Drug smuggling and human trafficking, money laundering, the illegal exploitation of natural resources and wildlife, the sale of fraudulent medicines or counterfeit goods: They're all criminal activities – and they're all highly lucrative.
As documented by the World Development Report 2011, these threats impede economic development, and Fragile and Conflict-Affected States (FCS) are especially vulnerable. In FCS situations – where countries have been devastated by war, are suffering from weak state security, or are enduring severe economic hardship – criminal networks operate with ease, using corruption and intimidation to undermine the integrity of public officials, institutions and the rule of law. Illegal activity often ends up undermining the state’s capacity to deliver even basic services. The far-reaching impact of such lawbreaking was recently explored at a panel – “Exploring the Link Between Fragility and Criminal Activity” – that was part of the World Bank’s “Fragility, Conflict and Violence Forum 2015.”
The diversion of assets toward illegal activities drains away resources and tax revenues that are needed for urgent human needs and vital civic priorities. Such a siphoning-off of scarce funds undermines governments' integrity and infects countries' investment climate – factors that are indispensable to creating jobs, boosting growth and building shared prosperity. This is an even greater danger in FCS countries, where trust in institutions is already impaired, and where lawbreaking can intensify popular grievances and provoke further violence.
A wide range of tools are available to practitioners seeking to address the scourge of criminal activity, helping them stem the illicit financial flows related to crime. On the prevention side, one example is the Extractive Industries Transparency Initiative in Nigeria, which shows how increased contract transparency in the extractives sector has worked as a remedy. On the enforcement side, there are also criminal-justice mechanisms, like “follow the money” tools that can help trace and recover the proceeds of crime. Improved domestic and international cooperation can also help to combat criminal activities and their furtive flows of funds.
The need to fight illicit financial flows has become a worldwide policy priority, with leaders of the G20 and G8 nations now fully engaged in the crackdown on crime. The World Bank Group, for our part, has focused several of our Global Practices and specialized units – our practice groups on Governance, Finance and Markets, Trade and Competitiveness, and Energy and Extractive Industries, along with our Stolen Asset Recovery (StAR) Initiative – on promoting coordinated action to fight criminal activities and illicit flows of funds.
Efforts to ensure honesty, transparency, accountability and the rule of law help strengthen all aspects of the development process, and they are particularly important in FCS conditions. Understanding criminal activities in FCS situations, and asserting potential remedies, helps promote a clearer vision of the steps that can be taken to reduce transnational crime and to focus the full measure of the world's resources on achieving development impact.
Conflict and Fragility Week
Jump-starting job growth is difficult enough when a country’s investment climate is supportive, when its government has clear goals and competent capabilities, and when its business leaders can make far-sighted plans. When an economy is riven by the chaos of war, or when it is newly emerging from a severe social trauma, channeling capital toward private-sector job creation is even harder.
Amid this year’s FCV Forum at the World Bank Group – focusing on economies gripped by fragility, conflict and violence (FCV) – a seminar combining Financial Sector and Private Sector priorities heard a sobering picture from expert practitioners who have been on the front lines of promoting job growth in economies that are in turmoil. Moderated by John Speakman, the Lead PSD Specialist in the Bank Group’s practice on Trade and Competitiveness – who is the author of a new book on small-scale entrepreneurs in FCV situations – a panel explored the daunting challenges of promoting private-sector growth when countries are in turmoil.
Would-be job creators confront an enormously complex task in FCV situations. Yet the panelists agreed that there is reason for hope – even in the most tumultuous FCV conditions – if financing can be targeted toward promising startup companies, and especially toward potential “gazelle” firms that can energize new sectors of the economy.
“Ultimately, it’s all about money: Poor people are poor because they don’t have money,” said Hugh Scott of KPMG, whothe Africa Enterprise Challenge Fund (AECF). “It’s the delivery channel – the financing mechanism – that’s making the difference” in the 23 African countries where the ACF has offered grants and interest-free loans to about 800 private-sector firms, producing a net development impact of about $66 billion.
The difficult business environment and increased risk profile in FCV countries means that traditional lenders (primarily banks) are all the more hesitant to lend, said Scott – making such vehicles as “challenge funds,” which focus on promising small and startup firms, even more important. As co-founder of invest2innovate (and current World Bank Group consultant) Sadaf Lakhani noted, the “ecosystem problem” for Small and Medium-sized Enterprises (SMEs) and startups is all the more complex when countries face “a political economy of war.” As she had observed during her work with invest2innovate -- a nonprofit angel investing and accelerator organization -- such frequent FCV afflictions as corruption, patronage, fragmented markets and capital flight make it even more difficult for managers and lenders to identify, evaluate and accelerate startups.
Bank financing, in fact, is not always a ready source of funds for startup ventures, as noted by Simon Bell, the Global Lead on SME Finance at the Bank Group. Banks weigh the historical profit-and-loss performance of would-be borrowers – yet the entrepreneurs who are behind the “small sub-set of firms,” like the so-called “gazelles,” that are destined to create jobs quickly have little or no financial track record. Startups are thus often viewed warily by risk-averse bankers. Drawing on his long experience in the MENA region, Bell underscored that a priority in FCV states is ensuring that there is “a continuum of financial institutions and services” – like early-stage financing, private equity, venture capital and angel financing – that can provide critically important financing at various stages of a dynamic company’s growth.
To help give a boost to startups and young firms, the International Finance Corporation has created several financing mechanisms that are having a positive impact on job growth. The SME Ventures Program, created in 2008 with a $100 million allocation from IFC, has aimed to reach businesses in the poorest of the poor countries, often in FCV situations, said its Program Manager, Tracy Washington. Having financed about 60 SMEs, and having already supported the creation of about 1,000 direct jobs and many more indirect jobs, the SME Ventures Program has had a positive “demonstration effect,” inspiring new entrants to serve the marketplace once they have witnessed IFC’s strong performance. In addition, IFC's Global SME Finance Facility, described by Senior Investment Officer Florence Boupda, has provided investment capital and advisory services to 27 financial institutions in 18 countries since 2007 – including 17 projects in seven FCV countries.
The challenge for the future, agreed Boupda and Washington, will be to find additional ways to combine Bank Group interventions in ways that continue to choose companies with the greatest potential and that maximize the impact of Bank Group support. Their insights were underscored by Bell, who emphasized that “globally, employment is our issue” – and who asserted that “there are points of light all around” in this “very exciting” area, as various arms of the Bank Group focus on “the employment imperative.”
Finding ways “to apply the most innovative solutions to the most challenging situations,” especially in FCV and other traumatized countries, remains the grand challenge for international financial institutions, concluded Michael Botzung, IFC’s manager for fragile and conflict-affected countries in Sub-Saharan Africa. Yet the determination of the energetic practitioners on the SME financing panel reminded the FCV Forum audience why there is cause for hope – and why, in Speakman’s words, the intensive WBG-wide efforts to promote job creation in the toughest FCV situations is “one of the things that makes us proud to be with the World Bank Group.”
"The best thing about my job is the amazing people I meet—and last week was better than most. I was in Cape Town for a meeting of social entrepreneurs and peace-builders. They were gathered under the banner of the World Bank Institute’s Innovation Fair to surface new ways of addressing conflict and delivering services to poor people in fragile states..."
Right now in Cape Town, the Development Marketplace is holding the first of a new generation of DM activities -- an Innovation Fair on Moving Beyond Conflict tied to the 2011 World Development Report and drawing on a pool of innovative solutions discovered during an on-line competition (the new innovation "radar") last month which registered 2,000 users, producing 223 projects from 40 countries.
You can follow the action and join the event virtually through this website hosted by our local partner:
Here's an update on the new Innovation Fair: The on-line competition which has been running for the last 3 weeks officially closed at midnight on Sunday March 7. The response received, especially given the short time, surpassed our expectations with over 1900 registered users and 223 submitted projects from over 40 countries. Ideas ranged from innovative uses of crowdsourcing to map peace in Kenya to tools that can improve governance in Haiti in post-earthquake recovery. The participation has been a truly global one with entries from conflict-affected countries like the Democratic Republic of Congo, Somalia and Burundi, and those from countries that, per se, are not considered conflict-affected but still experience some of the same issues such as youth violence. What impressed me most was the dialogue that sprang up among many of the users -- exchanging ideas on how to replicate one project in a different context, how to improve an idea based on experience and in same cases, simply words of encouragement.
It was this same crowd of users that through their votes selected the proposals that were passed on to be now reviewed by a panel of experts composed by World Bank and International Finance Corporation staff, academics and practitioners. All proposals that received 8 votes and up made it to the second stage this time and are now being reviewed by the panel of experts that will select the 30 projects that will make it to the Fair in South Africa. The list of 30 selected projects will be posted on the innovation radar platform next Wednesday, March 17. Thanks to everyone who's contributed and for the great ideas you send in -- this is a pilot and we are already learning how to do this even better next time!
In case you are wondering why a busy person -- like you -- should take some time off to offer ideas for the Innovation Fair on moving beyond conflict in Cape Town in April -- well, here's a story...
Today, I learnt that a high school classmate was burnt to death by rampaging youths during a violent crisis in an African country. I keep imagining what she was thinking about the last few minutes of her life. I remember us talking about growing old, having children and grandchildren -- the dreams of youth. Those dreams will never come through for her, and mine for as long as I have them would always be scarred. Now if this was a rare and unusual incident, we could dismiss it as an unfortunate tragedy and move on. Yet on daily basis, thousands of people in various parts of the world have to face and live with such tragedies -- losing sisters, brothers, daughters, sons, parents, cousins, and friends.
With a significant proportion of the world living under conflict conditions or under the fear of a potential conflict, we live in extraordinary times. The need for intellectual exchange, thinking outside the box, and cooperation has never been greater. Armed conflict, crime, and violence spill over borders -- no one is immune. How we handle these challenges will determine the world's fate for generations to come. To address these issues can we continue business as usual? The answer should be clear: We can not.
Call for Proposals - Feb. 15 –
March 2 NOW EXTENDED March 7 - Now Accepting Proposals
Soliciting Innovative Approaches and Research to be presented during the Conflict and Fragility Week in Cape Town, South Africa, April 12-15, 2010
Necessity is the mother of invention. Many times, people living and working under the most difficult and challenging conditions, with minimal tools and capacity, have come up with creative and even innovative solutions to the enormous challenges they face. Organizations and researchers around the world have been equally creative working with communities living in situations of fragility and conflict to find solutions to ensure delivery of basic services, improve governance and create jobs.
Innovation Fair: Moving beyond Conflict
This Innovation Fair, organized by the World Bank Group, is seeking to identify such high-impact approaches to working in fragile and conflict-affected states in order to share and, if possible, scale them up. The Fair will convene international experts on conflict and fragility, development researchers and practitioners, software developers, donors and private sector to exchange experience, establish new collaboration, and forge longer-term partnerships.