July 22, 2015
Min read

Development Policy in Times of Globalization

Marcia Valkenhoff

Globalization has changed the way we think about international relations. As the world becomes more closely connected – a result of the widespread use of the internet and mobile telephones – the main challenges communities face are becoming more and more intertwined. Terrorism, migration, climate change, water scarcity, financial stability are all challenges that call for new approaches. Governments no longer have a monopoly on international relations. New players are rising to the center stage as businesses, nongovernmental organizations, large private foundations and individuals are becoming more effective in finding solutions for complex challenges.

Globalization has also changed the way we think about developing economies. Traditional development cooperation in Africa, Asia, Central and South America, with a strong focus on poverty reduction and a high dependency on aid provided by donors, has proven not to be the answer to lift countries and its people from poverty in the last fifty years. Foreign investments and remittances (the money migrants send to their families back home) already surpassed official development assistance in the early 1990’s, although geographically unevenly spread, with China being the largest recipient and the thirty-three least developed countries in Africa receiving less than 2%. Countries that have managed to develop, providing their citizens with better futures, did so because they focused on economic development, not poverty reduction and aid.

As a former diplomat for the government of the Netherlands having worked in and studied developing cooperation and international relations for more than 20 years, I strongly believe in business for development as part of the answer to stimulate economic growth in developing and emerging economies. Economic development enabling the growth of middle class should be the central focus of any policy to facilitate sustainable change. Research has shown that the most important lesson to be drawn from the development of modern states is a positive link between the interests of the middle classes and the (local) government. Governments of developing countries can play a facilitating role and provide a sufficiently stable social economic climate. If this happens, middle class can become a social group that helps to build the nation or larger region.

The main question in development is how external support can most adequately respond to what is needed, and how it can be given in a way that makes a maximum contribution to the capacity of recipient countries to solve problems themselves. Stimulating employment to enable people to earn their own living, strengthening economic sectors and the productive and innovative capacity of countries, diversifying the economy and strengthening the local capacity to find solutions are important parameters for development. An important additional aspect is the strengthening of regional cooperation to facilitate activities in and between countries and regions, with economies of scale wherever possible.

Key to any developing economy is the role of small and medium sized businesses. These businesses are the motor behind economic growth, an increase in consumption and the development of a stronger and larger middle class, employment opportunities and higher exports, enabling the general population better access to education and health care. The middle classes have other interests, values and economic habits than the elite or the poorest groups in society. The objective of middle class is capital accumulation, to provide a positive outlook for future generations. A relatively large middle class is an important factor for stability in societies and the development of an effective economy and physical and social infrastructure.

It has proven to be a challenge for traditional donors and governments to find the right instruments to provide aid to small and medium-sized entrepreneurs. Development is context-dependent and country-specific. External support therefore has to be specific to be effective. Each entrepreneur has different needs and encounters different challenges on his or her way to success. However, a key obstacle all entrepreneurs in developing and emerging economies encounter is a lack of access to capital to realize their business opportunities. Existing financial structures are often focused on either micro-credit or large scale foreign investment. Foreign investment can lead to development if it has a positive effect on the existing local economic infrastructure and small to medium sized businesses. It is essential that commercial financial services can be offered to small and medium sized businesses. There are many analyses of development models but few practical solutions. At the same time, Africa is preparing for an internet revolution. This is where Kountable, a company with its roots in Silicon Valley, comes in.

Kountable supports economic activity by providing trade finance to smaller and medium sized companies in developing and emerging economies, using new technology to select and support promising entrepreneurs. Key in this approach is determining what we call the k-score of an entrepreneur; the strength of his or her social network. Kountable enables entrepreneurs to work faster and realize larger transactions, ranging from $20,000 to $500,000 USD per transaction with the possibility of repeat business.

In selecting the cities or countries for its operations, Kountable not only looks at promising entrepreneurs, but also looks at the wider context, such as state capacity as an important enabling factor for economic growth in developing and emerging economies. Middle and small businesses thrive best in an environment where the government supports the growth of small and medium sized businesses and more in general stimulates a good business climate. Change does not come about in societies or through the state but in the relationship between them. External support should therefore be focused on environments where small and medium sized business, the government, media and technical and financial experts cooperate. This is what Kountable does.

Kountable was officially launched in Rwanda in May 2015 and these first months show a huge potential for investors interested in social impact investing. Pilot operations were launched in October 2014 and in the first 7 months, we have completed around $3mm in transactions in Rwanda. The amount of net income we project to Rwandan businesses of the first 14 completed transactions is 750,000 US.

Kountable’s operations are run by a team with professional experience in both finance and technological innovations and is already spreading its activities to Rwanda’s neighbouring countries Uganda and Kenya.

Kountable foresees the launch of its operations in a second country before the end of 2015, most likely in India, the subcontinent with more poor people than in the whole of Sub-Saharan Africa. In 2016, Kountable will start its first operation in Latin America. Formal and informal investors interested in high returns on their social impact investments now have the opportunity to contribute to and share in the success of Kountable’s operations in developing and emerging economies.

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