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The recession has drawn the aid debate into even sharper focus as ‘cash strapped’ governments in the West pledged to continue giving aid – G20 leaders agreed at last month’s summit London that an extra $50bn would be needed to assist the developing world through the global economic crisis.

Today’s global financial pressures place ever-heavier emphasis on the need for Aid to work, and the rising popularity of Zambian economist Dambisa Moyo has giving fuel to the debate of whether Aid should exist at all – the debate has raged between Moyo and Jeffry Sachs in particular. Moyo argues that Aid achieves the opposite of its desired effect, encouraging dependency, corruption and stifling enterprise and innovation:

“With aid’s help corruption fosters corruption, nations quickly descend into a vicious cycle of aid. Foreign aid props up corrupt governments – providing them with freely usable cash. These corrupt governments interfere with the rule of law, the establishment of transparent civil institutions and the protection of civil liberties, making both domestic and foreign investment in poor countries unattractive.”

She argues that the success stories used to support those who are pro aid-giving vary hugely from the African countries still receiving aid today – notably the aid the ‘success stories’ received was smaller in amount and shorter in duration – they then moved on to adopt market-based, job-creation strategies. Holman, former Africa editor of the Financial Times argues that aid diminishes the role and responsibility of the State to its citizens – the basic contract between a citizen and the State breaks down as the State fails to deliver basic services – roads, water, schools and clinics – within the context of an aid-dependent state, these services are better delivered by a third party, such as an NGO.

Moyo and Holman make some very valid points and for countries who rely heavily on aid, adopting new financing and development strategies and ‘weening’ themselves off aid in the long-term can only be a good thing. However, Moyo’s argument can also be taken at face-value and very simplistically and misused, without more detailed understanding of the nuances of her argument and of the different forms of aid and the circumstances in which it is needed and can work. We can ill-afford to desert the poorest who can only be worse-off as a result of the financial crisis and who are in need of basic social protection.

Steve Radelet, senior fellow at the Center for Global development in Washington, poses some solutions in ensuring aid is used in the right way:

  1. Be more selective. Africa is not a monolithic entity. More aid should go to countries that can use it well, especially the emerging democracies that are implementing sensible economic policies.
  2. Set clear goals, set them publicly, and measure results with independent monitors.
  3. Streamline bureaucracies and make sure a larger share of funds gets to those that need it most.
  4. Listen more. Ask Africans – government officials and ordinary citizens – what they need most and how programs can best be implemented both to achieve immediate goals and build capacity over time.
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Predictions over the future of of microfinance vary between optimism and downright doom and gloom.

Inflation is thought to be the real criminal for any struggles Microfinance Institutions (MFIs) may face, leading to an increase in MFIs operating costs, leading to an extra burden on clients, most of whom are the poor. In addition MFIs may face difficulties as the cost of commercial borrowing rises – money is simply becoming more expensive. Some reports suggest that borrowing costs have risen by up to 4.5 % in some markets. Funding from development institutions like the World Bank’s International Finance Corporation (IFC) is likely to be stable but aid budgets are being cut and other sources are being threatened. Concerns are being raised over the refinancing of existing debt and reports by the IFC show that the share of borrowers 30 days delinquent on their loans has increased from 1.2% before the crisis to between 2% and 3% now. Although still low by most loan standards the Economist argues that ‘a prolonged credit crunch could make microfinance clients start to look more like those hapless subprime borrowers’.

However, Mohammed Yunus, Nobel Peace Prize winner, and founder of the famous Grameen Bank, argues that “we have not been touched in any way by the financial crisis. The simple reason is because we are rooted to the real economy – we are not paper-based, paper-chasing banking. When we give a loan of $100 behind the $100 there are chickens there are cows. It is not something imaginary“.

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Some research suggests that microfinance is relatively safe from the downturn because it ‘performs differently to the mainstream’ and is ‘counter cyclical’ and is very different to the subprime loans that some critics have compared microfinance to. This is because it lends small sums of money to people in the developing countries so start small, profitable businesses not overpriced homes. Indeed ‘many of those businesses serve local needs which has more merit at a time when exports are collapsing’. The Economist argues that the Microfinance industry is ‘sub-par but not sub-prime’.