Welcome to the latest local government finance blog from United Nations Capital Development Fund. Finance ministries, Central Bankers, and Local Governments from a group of developing countries are meeting this Thursday November 5th Local Finance Initiative annual board meeting to discuss strengthening domestic capital markets and promoting investment in local economic development by domestic banks.
This is the first of three blogposts leading up to the global board meeting which will highlight some of the local development finance issues that will be addressed. Today’s post is about how the Local Finance Initiative applies geographical economics to finance at the (real) frontiers. Tuesday’s post is on financing local economic transformation. Wednesday’s post is about financing urbanization,
Fans of Star Trek will recall the original series featuring a collection of planet Earth’s best and brightest including Lieutenent Nyota Uhura, Lieutenant Hikaru Kato Sulo and their colleagues venturing beyond our solar system “To explore strange new worlds. To seek out new life and new civilizations. To boldly go where no one has gone before”
Space is not only a galactic frontier, it remains a terrestial one. The continuing pandemic and our different responses to it demonstrates that places and spaces remain unique across the globe. Whilst ideas and money flow across some frontiers at the speed depicted as science fiction in Star Trek 50 years ago, paradoxically sometimes the people who thought those ideas or whose labour made that money find that frontiers remain stubbornly terrestial, especially if they are seeking new lives.
In economics space is also a frontier. Orthodox economic theory is often spatially blind and dismisses the effects of space and place as market imperfections or market failures. In this way, abstract theory supposes a world without space and distance and sees their existance as a nuisance that gets in the way of its assumptions about how markets should “ideally” operate. By contrast, Local Economic Development takes locational specificity as the starting point and builds outwards on the foundation of local resources (human, environmental and financial). This is why whilst everything happens somewhere, not all development is local development. John Tomaney explains this well in the Capital LoCAST podcast earlier this year. Leonardo Romeo puts it like this…
“Clearly it [Local Development] is not just development that happens locally (as all development ultimately does), but rather development that leverages the comparative and competitive advantages of localities and mobilizes their specific physical, economic, cultural, social and political resources. Said differently, in the expression local development the adjective local does not refer to the where, but to the who and the how of development promotion. It refers to the actors that promote it and the resources they bring to bear on it. Development is local if it is endogenous, open and incremental, that is: if it makes use of locality-specific resources, combines them with national/global resources and brings them to bear on the national development effort as additional benefit in a positive sum game.“(Romeo, The Imperative of Good Local Governance, Chapter 3: 2013)
Frontiers are a great opportunity for local development because the latent place based economic potential is often untapped. In many places the road becomes less trafficked and the economic activity less noticeable in frontier regions. Cross border trade means sealed containers travelling between crossing the border rather than actual trade between the local economies of the border regions on each side of the frontier.
Each side of the frontier is a different economic space with different factor endowments that can complement those on the other side. The opportunity for arbitrage can also exist. The regulatory environment and availability of capital is different on each side. In theory, this presents opportunity. In practice however border regions can be poorer than other parts of the country and often face inwards towards the hinterland rather than outwards towards the opportunities across the frontier. Yet, there are also cases where the frontier does act as a magnet to economic activity.
How can we promote economic development in frontier regions of developing countries? This issue becomes more critical in the light of the recent report from the United Nations Committee for Development Policy which calls for the building of productive capacity in the least developed countries as part of the economic recovery from COVID-19. For the reasons outlined above, frontiers provide a specific set of circumstances that can provide the foundation for a local development finance approach that puts space and place at the heart of the matter.
With the generous support of Luxembourg, Sweden, Switzerland UNCDF, with other UN agencies, has been working in cross border areas for over a decade. This blog entry provides three recent examples that succintly but vividly explain how local development finance in frontiers can have a rapid catalytic effect, sparking exponential increases in living standards. Exactly what the world will need to recover from the Coronavirus
Tanzania – Burundi frontier
Look at a map of the world. Many frontiers follow natural features such as rivers or ridges, others are straight lines drawn during negotations far from the terrain. Communites and economies have been divided by these lines and the new political realities that they produce. Kakonko, on the border between Tanzania and Burundi is one example of how borders imposed from outside reduced pre-existing trade patterns.
The good news is that this is changing, and fast. A local development finance approach is driving public and private investments that are quickly strengthening the local economy and raising household incomes. The Kakonko Cross Board Market will have more than 23 new buildings in the village for trade and public services (e.g. Police Gender Desk, immigration services). Over 150 youth and women have been allotted permanent trading stalls. More than 100 women in Muhange Women Cooperative Group have benefitted from trainings on good agricultural practices, post-harvest handling and storage, access to finance, access to markets, and gender awareness. The Kakonko District Council’s own source revenue from this area is also expected to increase fourfold in one year of operation.
Don’t take my word for it – the short video above provides inspiring details..
Full credit to the Tanzania One UN fund for their support of the Kigoma Joint Programme in which this approach is embedded.
Burkina Faso – Niger frontier
Security concerns often hold back a frontier economics approach. Traficking, (unwanted) migration, contraband and terrorism are real. Yet if designed correctly, local development can mitigate these concerns. A recent example is in West Africa’s Sahel region where UNCDF worked with the ECOWAS peacekeeping operation, UEMOA monetary union and the governments of Burkina Faso, Mali and Niger. At the confluence of these three countries security concerns overlapped with the nomadic cattle trade and it was possible to boost the traders and other local families whilst reducing security risk by investing in cross border value chains taking advantage of factor endowments on each side. The diagram below illustrates the interlinking of investments in border economic activity stimulated by the local development finance intervention.
UNCDF invested of $260 000 to pilot this process of cross-border local development to support for the implementation of pastoral infrastructures.
Full credit to the government of Luxembourg for supporting UNCDF and the Sahel countries to make this happen.
Cambodia – Thailand frontier
The current pandemic means that Cambodia is keen to accelerate its economic integratation with its neighbours and diminish its relieance on global value chains. Poi Pet, on the border with Thailand, expanded from 43,000 inhabitants in 1998 to 90,000 in 2008 and over 140,000 today. Vehicle parts manufacturing in Poi Pet is supplied by cheap electricity from Thailand. The long closed international rail link was re-established in 2018. The local government in Poi Pet is struggling to keep pace with the rapid increase in waste.
The government and UNCDF are working on an innovative Public Private Partnership for a $30m waste to energy project in Poi Pot which will simultaneously fix the waste problem and generate power for the expanding economy. This uses incineration with energy recovery technology and is expected to have an annual waste processing capacity of 50,000 tons and an electricity generation output of 25,000 MWh per year. The plant will also supply steam for nearby processing industries. The financial structuring includes creative solutions that build on the border location.
Full credit to the governments of Sweden and Switzerland for supporting UNCDF and Cambodia to make this happen.
Finally, whilst borders are often the result of past conflict they present great opportunities for peacebuilding. The European Union began with cross border trade along the River Rhine borders following the devastation of the 1939 – 1945 war.
Working with the Swiss and German governments, UNCDF is also supporting cross border trade and development in another area – Ground Water Management and Water Basin Management with a strong focus on peacebuilding through the sharing of water resources. But that is a subject for another blog – watch this space!