These few lines came to my mind after one of our Board of Directors’ meetings devoted, among other things, to a new participation in an important microfinance institution in Morocco - a country famous for its involvement in the sector. I have, for a long time, been an avid supporter of microfinance. And I am particularly proud of the important increase in the amount of investments made in this sector by my organization, AFD, over the past 20 years: through 60 projects and nearly 300 million euros invested, we have helped more than 1.5 million people make their way out of poverty. We now want to go further, encouraged in this by GCAP’s very positive evaluation of our involvement. I see microfinance as a powerful tool against exclusion; it allows people who have been traditionally excluded from the financial systems to have access to credit. Great tribute must be paid to the pioneers of this revolutionary approach.

Microfinance has crucial objectives: it allows people to escape from the vicious circle of excessive interest rates, promotes equal rights for women, helps to overcome some of the failings in the traditional banking system and provides a financial safety net for those wishing to invest. Thus, for its 130 million beneficiaries throughout the world, it responds to a real need. Besides, it is the archetype of a large-scale and equally promising concept, that of “the bottom of the pyramid”, the issue of the “market of the poorest”.  
Above all, it challenges conventional wisdom, demonstrating to even the most skeptical that the poor are able to repay their loans, sometimes more effectively than the rich. It also shows that a financial system based on social networks can work, particularly if it is based on the principle of joint surety.

This positive assessment of microfinance goals should, however, not dispense us of a critical analysis of their impact. And I believe it is time to engage in such an evaluation. This is crucial for AFD, considering our long involvement in the sector, which makes us ones of the biggest actors in that field. What lessons can we learn from our many years of experience?

There have been various development assistance trends in the past, which have created the illusion of magical formulas. When the trend disappears, the tendency is commonly to throw the baby out with the bath water. Today, microfinance is clearly trendy. Will it suffer the same fate, i.e. a phase of infatuation, before it is thrown out to the dustbins of development assistance history? Since the 1990s, microfinance has not stopped to capture large public interest. The number of stakeholders involved and tools proposed have multiplied, the number of loans granted increasing on average by 25% each year. Smart young financiers launch their careers in the microfinance sector and investment banks in the developed world rush to finance it. We hear that microfinance is the solution to urban poverty and rural isolation; it is meant to reveal every poor person’s entrepreneurial spirit. The decision to grant the Nobel Peace Prize to M. Yunus, who put the sector into the spotlight, seems to indicate that microfinance could even contribute to international peace.

Can all these benefits be attributed to microfinance? It is important to see microfinance for what it is: a tool that has proven its remarkable efficiency in reducing financial vulnerability but that cannot, on its own, eradicate poverty - and that is often used with a more social than purely productive end. It efficiently supports the sense of creativity and initiative of the poorest, women in particular, but cannot generate the conditions for this sense of initiative, offer opportunities for investments when those do not exist, nor overcome by its own the huge physical, political and cultural obstacles that development countries are facing in their quest for economic wealth. As Pr. Yunus advocates, microfinance can contribute to change the structures of capitalism. But it cannot be a substitute for investment in sectors such as education or health. It should therefore be used as part of a global public policy to develop finance, services, infrastructure and more broadly bring new opportunities for the poorest.

Our concern is to prevent microfinance from becoming a victim of its own success. Overestimating the impact of microfinance could lead to a situation where its real benefits are overlooked. Accurate assessment of the results produced by microfinance is therefore essential, and this is why my agency is currently evaluating the economic and social impact of the programs that we support in the isolated rural regions of Morocco.

The future development of microfinance requires such a balanced approach. Although it has been very successful, the sector is not yet fully developed, and still faces two major challenges.
The first is to improve the sustainability and quality of the financial services offered, in order to increase their social impact. This would require the institutionalization and professionalization of microfinance institutions. There is no ideal system of governance in this sector that is more complex and varied than is often thought; it should rather be tailored to fit the various contexts and cultures of the countries involved. The qualitative development of the sector would also require development of the local banking systems, and a suitable legislative and regulatory environment.
The second challenge involves extending these services to the poorest people and to the most isolated regions, particularly the rural areas. This goal is made all the more crucial by the food crisis that developing nations are encountering today. If we compare the 130 million people who benefit from microfinance to the 3 billion people living below the poverty line in the world, it is clear that the emphasis should be put on improved access to financial services, i.e., making them more “inclusive”.

Promising new projects are being developed, such as the “mobile banking” project in Kenya and South Africa, or micro-insurance systems (protection against climate risk for farmers, health coverage for the poorest groups). Any further growth should, however, imply better structuring and regulation of the sector, including the introduction of monitoring systems and effective guarantees against risks. Donors should steer microfinance institutions in this direction. Safeguarding and promoting the sustainability of microfinance structures ought to be a priority: it is our responsibility towards all those who have put their trust in this new service.

So does microfinance only have micro-impacts? Not only, since the long process of development is precisely made up of a series of micro-changes at the family and community level. But such would be the risk, if our vision of development came to be limited to the promotion of a tool that, as remarkable as it is, cannot, as any other, be a magic wand for development.
JMS 

Having just returned from Senegal, I want to share my thoughts with you on an issue that became strikingly clear to me: the favorable perspectives shaping up for Africa’s agriculture and their complex implications for future energy choices.

While traveling through the irrigated rice production area in the Senegal River Valley, you could see the new opportunities that rising world prices of agricultural commodities could bring to African agriculture. The changes in Senegal are down right impressive. To be sure, the dramatic upturn in world prices is spawning many challenges for net importers of agricultural commodities and for the World Food Program, as Josette Sheeran so emphatically points out in this blog. In addition, it is creating a fair amount of social and political tension in some urban areas. In order to be beneficial for all, this price surge must therefore incite cities to become better suppliers and service providers to their rural peripheries, so that cities also reap the benefits of improving conditions in rural areas. (I will come back to this fundamental relationship in another column.)
I am convinced that if managed intelligently, the rise in world prices can offer real long term opportunity for Africa’s economic development. The prices for African products are once again attractive, and this is opening up new commercial opportunities for both food and export crops. The Senegalese farmers I encountered are starting to invest again, a sure sign of better days to come.

All bets point to a trend of rising agriculture prices that will continue through the coming years. Of course there is an element of speculative buying at present price levels. Current market volatility makes corrections not unlikely, and is a surefire guarantee of short-term price fluctuations, which could prove a bit dicey. But several structural factors (rising demand for agro-fuels, world-wide demographic growth, increasingly meat-based diets, and climate imbalances) indicate that the trend will continue, and this will significantly raise the returns on investments. African agriculture, which has enormous potential, could greatly benefit from this trend in both the short- and mid-term.

The Senegal River Valley offers a perfect example of an agricultural zone where margins of productivity are still quite wide. Irrigated areas could be expanded even further, given abundant water resources, improving technical capacities of traditional farmers, and a rapidly modernizing agro-industry (the latest irrigation technologies, increasingly productive tools). With major investments in infrastructure, Senegal has the capacity to create near perfect conditions for developing a highly competitive agricultural sector in the Valley. Current price trends combined with expanded irrigation capacities, in a country where the agricultural sector already accounts for 18% of the economy, could translate into a highly stabilizing dynamic for the national economy. The same could also be said for other regions, such as Mali, where irrigated agriculture in the Office du Niger zone still offers considerable potential.

But the indispensable expansion of agricultural production in Africa makes the energy capacity a growing problem. Indeed, any modernization in production methods presupposes sustainable access to energy. It is needed for pumping water, exporting food-stuffs, and ensuring effective cold chain facilities for storing and distributing perishable goods. This question made more pressing by the energy crisis currently sweeping the continent. In recent years, this crisis has shaved economic growth for West African countries by 1 - 1.5 percentage points. Senegal’s electricity sector is particularly affected where, even as I write, supply is still falling short of the 8% to 10% annual increase in demand. As for local farmers, they fear that rising energy prices will offset the benefits of rising agriculture prices.

This raises a touchy issue: the choices nations must make in terms of their energy policy. In fact, the current reality of high global energy prices could be the incentive for many African countries to turn to new energy sources. The most rational choice would obviously be to start immediately promoting the development of renewable energy (wind, solar, biomass, hydroelectricity), whether it be for reasons of environmental protection, energy independence, mid-term price competiveness, or the logic of preserving exhaustible resources. But this raises the dilemma of “unfair competition” from fossil fuels, which are lower cost investments and have the advantage of being immediately available, and often are largely subsidized.

This brings us to the fundamental question: Can Africa wait for clean energy given that current trends are offering immediate opportunities for economic growth? Does this question not pit long-term environmental logic against short-term growth logic? In light of our own past energy choices in the developed world, can we legitimately tell Africans that they should not acquire polluting power plants, even if necessary for responding to their pressing energy needs? Do they really the choice of going either for equipment that is readily available and still rather inexpensive or energy options that are wiser in the long-term (including for economic growth) but that are currently very costly and technically more complicated to set up?

While we should not wait any longer to promote renewable energy sources, their effective implementation corresponds to a long-term objective. And it’s quite obvious that developing countries will be unable to handle the entire technical, financial and operational burden on their own. This is why we must offer long-term help by extending financial and technical support to both public and private players. The experience of developed countries could be effectively transferred gradually with the goal of anticipating future needs. But given the scope of immediate global food needs and the commercial opportunities that are available now, we simply can not deny Africa a right to economic growth. An approach that balances short-term economic opportunities and promotes emerging environmental standards seems therefore to be the smartest choice.

Senegal’s electricity sector reforms offer a good example of such an approach. This ambitious project, supported by AFD, consists of a sector recovery plan (2007-2012) based on financial and institutional restructuring. It promotes bolstering electricity output and seeking new investments, as well as a policy that discourages waste and encourages energy efficiency. In addition, the reforms are coupled with a political will to develop renewable energy sources in Senegal, a country where 80% of energy output is currently thermal. Three massive regional hydroelectric projects also are going to be implemented, and several production units devoted to solar and wind energy will be created.

If effectively managed, these reforms will enable Senegal to sidestep the unfortunate position of having to choose between economic growth and environmental concerns.

JMS

Is it fair to ask developing countries companies to follow the rules of Corporate Social Responsibility considering that our countries have developed themselves without such constraints? Would you consider CSR as a form of protectionism?

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Sorry that it has taken me a bit of a while to get back to you on the issue of Aid for Trade. I have just been able to sit down after a busy week discussing with WTO members and Heads of International Organisations on this topic.

It was never going to be easy to bring together the huge crowd that we saw in Geneva last week for our first Aid for Trade Global Review.

Bob Zoellick, from the World Bank; Dominique Strauss-Kahn, from the IMF; Kemal Dervis, from UNDP; Donald Kaberuka, from the African Development Bank; Luis Alberto Moreno, from the Inter-American Development Bank; and Rajat Nag, from the Asian Development Bank were all there. Luckily none of them missed their plane connections!

We also had with us Supachai Panitchpakdi of UNCTAD; Juan Somavia, of the ILO; Edouard Dayan, from the Universal Postal Union; Patricia Francis, from the ITC and Abdoulie Janneh, from the UNECA. Never has the WTO seen so many heads of international organizations gather at our headquarters for a conference like this! I guess it is a clear signal of the importance they – we – all attach to Aid for Trade.

Heads of multilateral agencies.
From left to right: Luis Alberto Moreno, IADB - Edouard Dayan, UPU - Dominique Strauss-Kahn, IMF - Rajat Nag, ADB - Patricia Francis, ITC - Abdoulie Janneh, ECA - Pascal Lamy, WTO - Angel Gurría, OECD - Valentine Rugwabiza, WTO - Kemal Dervis, UNDP - Robert Zoellick, World Bank - Juan Somavia, ILO - Donald Kaberuka, AfDB

We also had ministers from many of our Member countries as well as representatives from civil society and from business.

This conference has given us the tools we need to put our plans on track. I was asked by journalists and members of civil society what was it that made this conference special. Obviously too many conferences come and go. So what is it that made this one special?

I would say there are three new elements: first, there is consensus to move on to the phase of implementation, to chose sectoral priorities and to mainstream them into development strategies at the national and regional level. Second, we need to develop good monitoring and evaluation tools; and thirdly, we need to ensure adequate funding.

Donors have made commitments that would lead to $8 billion in new financing for Aid-for-Trade by 2010 and bring the total support to $30 billion. Recipient countries need infrastructure, enhanced institutional capacity, better standards testing facilities and more knowledge among their officials on how to take advantage of WTO rules. Even with the enhanced financial commitments, however, there will always be resource constraints. So donors absolutely must deliver on their commitments and recipient countries will need to prioritize. Roads, telecoms networks, ports, testing laboratories, training programmes – all are essential but it will not be possible for every country to have everything it wants.

Clearly a lot of work ahead of us in 2008.

At the Conference we also heard a lot of voices in support of the Doha Round. At the end of the day the Doha Round is the WTO’s core business! Bob and Angel made vibrant interventions as did Garteh Thomas from the UK and the Finish Trade Minister Paavo Väyrynen. Aid for Trade is separate from the Doha negotiations but it is clear that the trade opportunities stemming from Doha will need Aid for Trade to be translated into realities.

The next three months will be crucial for the Doha Round which we all hope can be concluded before the end of 2008. I will keep you posted; Stay tuned.

I come back from Kenya.  AFD and other donors including the World Bank and EIB are financing a large-scale public geothermal investment program that will supply most of Kenya’s future power generating capacity. The power generation mix that will fuel Kenya’s rapidly growing economy over the next decade will be carbon-poor.

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Watch the video of the press conference held on October 21st in Washington (French and English).

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Should development agencies play a role in conflict prevention ?

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For many years now, academics have debated whether regional trade agreements are ‘building blocks’ or ’stumbling blocks’ for development and free trade.  Regionalism has recently returned to the forefront of attention, as the slow progress in the Doha Round of negotiations has led many countries to increasingly pursue regional agendas. 

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For those of us who work in the humanitarian world, the dawn of the twenty-first century has dealt us a difficult hand. As the expert practitioners in the game of preparing and planning for sudden, unpredictable events, we at the World Food Programme, the world’s largest humanitarian agency, have become the recognised experts in emergency response.

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