Rating agencies ... a big part of the rotten core financial system

Dear Colleagues

I have had an intense dislike of rating agencies for almost 30 years. It all started when credit cards were no longer given to trusted clients but to people with most suitable profiles. For many years I had been a "trusted" client and used credit cards as a sensible part of running my working life. I traveled extensively and a credit card was a tremendous convenience enabling me to work overseas for several months while carrying only a modest amount of cash.

My payment history was erratic ... I paid down the balance when I returned to the USA, and ignored all of this while I was travelling. I did this for about 15 years, and it worked very well. And then along came the "credit bureaus" and their "profiling". My erratic payment history earned me very low marks and my interest rate shot up from almost nothing to something over 20%. In all of history this type of interest charge has been called "usury" and has been illegal ... but not now in modern banking! I have not had much nice to say about credit card companies and the "credit bureau" world since that time. They have adopted technology and use it to "profit" and the concept of "service" has been eliminated.

In the Community Analytics (CA) system of metrics much of the profit of the credit card industry comes from value destruction for the clients who most need a good service! It would have been nice for my old ... and very good ... banking relationship to have transferred to the new technology based profiling system for credit cards ... but it never did. It was an early warning of worse to come!

Rating agencies are nothing more than a bigger version of the credit bureaus. They do more sophisticated mathematics, but at the end of the day they produce a simple metric to represent the quality of the underlying security. My impression is that rating agencies are doing complex mathematics that I cannot understand, and very little of common sense that I do understand. I have had conversations about some of the modeling ... and I know some of the real world situations to which the models relate ... and the lack of understandable correlation is mind-boggling. Of course, rating agencies are not being paid to provide common sense assessment, they are paid for the complex and totally opaque conclusions that result in the "rating". They have become major money makers in the Wall Street scene!

Most of the time nothing bad happens ... and it really does not matter whether the rating was AAA or something much lower. But when there is turmoil ... which there is from time to time ... it is only then that the true underlying strength of the security becomes apparent. The rating agencies labelled an awful lot of really low grade securities with a Triple A rating ... showing that either (1) their models are not worth very much; or, (2) they function in a perfectly fraudulent manner. It is difficult to know which. Both are bad news for a serious society.

In other posts I have spoken well of the way Goldman Sachs handled the sub-prime mortgage debacle and the fall out from this. By contrast, I think that the work of the rating agencies was a central flaw in the debacle, and I see very little that suggests that they contributed anything but dangerous misinformation into the run-up to the crisis.

What am I missing?

Peter Burgess

Econamici ... an observation about their dialog

Dear Colleagues

I was alerted to this essay, and think it is worth sharing. My thinking is increasingly diverging from the well known names in economics and financial journalism ... which may or may not be a good thing. Let you be the judge!

But it would be good if we could have some meaningful metrics so that the discussion is not about my opinion versus your opinion ... but about actual progress and performance, and relevant metrics about these things. Hopefully in due course the metrics of Community Analytics (CA) will help in this. Here is the essay:

Can Invading a Small Third-World Country Stimulate the Economy?
By pollycle
http://pollycle.wordpress.com/2010/04/29/can-invading-a-small-third-world-country-stimulate-the-economy/

Reviewing Reinhart and Rogoff’s This Time is Different in the May 13 issue of the NY Review of Books, Paul Krugman and Robin Wells assert that, “…history can offer some evidence on the extent to which Keynesian policies work as advertised.” After brief comments on work by the IMF and others, they proceed:

“An even better test comes from comparing experiences during the 1930s. At the time, nobody was following Keynesian policies in any deliberate way — contrary to legend, the New Deal was deeply cautious about deficit spending until the coming of World War II. There were, however, a number of countries that sharply increased military spending well in advance of the war, in effect delivering Keynesian stimulus as an accidental byproduct. Did these countries exit the Depression sooner than their less aggressive counterparts? Yes, they did. For example, the surge in military spending associated with Italy’s invasion of Abyssinia was followed by rapid growth in the Italian economy and a return to full employment.”

WHAT? If this is the best case to be made for “Keynesian” economics (as opposed to what Keynes might have meant in his General Theory)–then it’s past time to look for a new paradigm.

But let’s assume Krugman and Wells are serious. What’s the evidence, what’s the logic and what’s the alternative?

Start with Italy. If Italy really did recover quickly, crediting the Abyssinian invasion (1935-36) is still just a post hoc argument–no proof of causation. Besides, Mussolini was a very busy man–building new infrastructure, reorganizing Italy’s notoriously corrupt and ineffective government along fascist lines, even supposedly making the trains run on time. Maybe Il Duce did some good for the Italian economy. But then we don’t really know, as he tightly controlled the news and the statistics.

The “Keynesian” logic, as best I can explain it, holds that a crash makes people too frightened to spend money. Instead, they all try to save. This creates a downward spiral, in which lack of demand for goods leads to more decline, and more decline leads to more fear and more futile efforts to save. If the government steps in, borrowing and spending–no matter on what–that will reverse the downward spiral and restore the economy to normal.

An alternative paradigm runs as follows:

In ordinary economic times, businesses invest by combining labor, natural resources and capital equipment to produce goods and services. These goods and services then are consumed by the owners of the labor, resources and equipment, completing the little circle shown in Chapter One of every macro textbook. Money flows around the circle in the opposite direction, as businesses pay the owners, allowing them to buy the output. Public services and infrastructure–like schools and sewers–enhance production.

If something interferes with production, then there’s less to consume. The shortfall must be rationed, –directly by rationing coupons, or indirectly by inflation, or by cutting off credit to marginal businesses, which in turn lay off workers. It’s that simple.

What might interfere with production? Obviously natural disasters, like floods, earthquakes or volcanoes, or manmade disasters, like wars or oil spills–disrupt production. Less obviously, bad public investments like bridges and highways to nowhere also disrupt production; workers, resource and capital owners get paid–but the process creates no goods for them to buy. Military spending likewise fails to deliver the goods to compensate the producers. That’s why nations at war institute rationing–to prevent inflation.

Even less obviously, bubbles disrupt production. As in the recent housing bubble, land appreciation makes homeowners feel they’re getting richer so they don’t need to save and invest. Simultaneously, housing and related industries build too much housing–with the same effect on the economy as bridges to nowhere or stockpiles of useless weapons. There’s a shortage of goods people want, and that shortage must be rationed somehow.

When Wile E. Coyote runs off a cliff, he doesn’t fall until he looks down. A housing bubble bursts when investors begin to look down, as in 2007, and recognize the growing mismatch between expectations and supplies. By the time the crisis hits, the damage has been done. (It’s now conventional to blame the crisis on machinations of Madoff or Goldman, but the bubble made those machinations profitable, and hid them for years.)

So if invading a small third world country won’t stimulate the economy, what will?

The “Keynesian” paradigm completely disregards the quality of government spending, borrowing and taxation. We need policies now to get production back on track. Priority should go to supporting small business, which provides the most employment and production per dollar invested. That means at the least making credit available and mitigating that great job-killer, the payroll tax supporting Social Security. (See my prior pieces on “Deficit Hawk, Progressive Style.”)

Hey Paul and Robin, time to ditch the “Keynesian” paradigm and start over!

This essay sparked my interest ... as you may know, I am a big advocate for the Keynesian dynamic in economics, but in a form that is relevant to the technology and economy of today, just as Keynes tried to make his thinking fit into the problems and realities of his day.

Dear Colleagues

I was studying "Keynesian" economics at Cambridge 50 years ago. I have been in the USA for more than 40 years, and always distressed by the lack of understanding of what Keynes was all about.

Keynes did not "completely disregard" the quality of government spending, borrowing and taxation ... in fact Keynes was very clear about the need for savings and investment, not simply taxing (or not) and spending by government.

But this conversation is not particularly important at the present time because science and technology today is in a very different place than 70 odd years ago. So also, accounting and economic metrics are in a different place, and in my view fatally flawed. They are all about money profit, stockmarket prices and GDP growth, while the big issues of the day are about the social commons, the sustainability of the our technologies to serve nearly 7 billion people, huge needs not being satisfied for perhaps 4 billion people while competent people are unemployed. Capital markets need to be able to allocate capital where it is really needed, not merely where some people can earn a fast buck.

Knocking down is not a sensible idea ... allocating resources to building things we need to build social value for the planet is a very good idea. Please come into the 21st century!

Peter Burgess
http://communityanalyticsca.blogspot.com

The more I see the dialog grow ... books published, essays written ... about the disastrous economic performance of the last few years, I am even more convinced for the need for meaningful metrics. Putting value into the system of metrics can make a very big difference ... it will change the way the game is scored, and change the way the game is played.

Peter Burgess

Goldman was way ahead of the curve ... they got it right!

Dear Colleagues

One of the problems with modern society is that there is so much of it ... and because of this we have to use subsets of information in order to stay in touch with events and what is going on.

To stay in touch, we have to make use of information or data flows ... in other words, we have to rely on the media either in its traditional form or some of the new Internet data flows. These are more or less flawed ... but they are essential.

I watched many hours of the Goldman Sachs (GS) testimony on Capitol Hill in Washington last Tuesday ... and learned a lot more about the financial meltdown from this than I have done reading the news articles or watching the evening news on TV. By the time the news media put their "spins" on what took place, it was difficult to recognize very much of the 11 hours of testimony that I watched!

I have my own bias. I see everything from the perspective of Community Analytics (CA) and am continuously asking the question whether or nor some aspect of CA would have helped to make things better. To do this effectively I have also got to understand as much as possible the problem ... and especially the the key cause or causes of the problem. My work in trying to make CA useful is very different from the work being done by Congress. Congress makes laws that are at the "top" of the system ... CA does metrics throughout the system, from "bottom" to "top".

Part of the CA metric is the idea of value chain analysis. This is a very powerful methodology when it is applied thoughtfully ... and not at all useful when it is simply used mechanically with little or no understanding of the linkages between the stages, and the various complexities that are in play. With CA value chain analysis it is possible to see where profits are being made, and therefore where the incentives are to "do more". The profit dimension of CA value chain analysis shows that in the sub-prime mortgage debacle there were profit incentives at every stage of the industry from land developers, builders, building supply companies, mortgage originators, appraisers, real estate lawyers, real estate agents, community banks, regional banks, Wall Street banks, sophisticated investors, rating agencies, hedge funds, the Fannies and the Federal Reserve! ... not to mention all the businesses that benefit when the economy is roaring ahead including all sorts of luxury goods and service suppliers. The value dimension of CA value chain analysis, however, tells a very different story ... virtually NONE of the steps in the value chain add value even though there is reported profit.

Because there is little or no value adding in the foundation of the sub-prime mortgage industry, everything that is reported as "profit" has no substance.

In the old days when accountancy had very simple strong PRINCIPLES ... many of the reported profits would not have been taken into account so easily. But today, and for the best part of 40 years, accountancy in the United States has let laws and rules override accountancy principles, which has proved very convenient for a lot of corporate CEOs and their stockholders, but has also facilitated a whole lot of questionable practices ... that includes, but is not limited to the "mark to market" idea!

I was alerted to this dangerous practice early in the 1980s when financial institutions were reporting profits as they replaced high interest earning assets with low interest earning assets and were reporting record profits. Using simple balance sheet analysis, this is not reasonable, but it turned out that all the fees and "points" associated with transactions were flowing into the "profit for the period" when the old fashioned accounting principle would have required that these earnings got spread out over the life of the transaction rather than being taken in full the month of the transaction closing. What this meant was that the "balance sheet" of a financial organization took second place to the transaction fee component ... and, of course, over time banks stopped being about the balance sheet but more about the fees, to the detriment of society. The seriousness of this did not become apparent until the crash of 2007/2008 when it became abundantly clear that the balance sheets of the financial sector were compromised even while profit reporting was stellar!

What GS demonstrated on Tuesday was that the market system works pretty well, but you need the staff to be paying attention and making decisions that make sense. The "short selling" that GS Sachs did was much more "prudence" than it was "gambling" ... and in a "capital market" the function of market maker is just that. GS bought and sold whatever was required by other buyers and sellers.

None of these transactions were with "retail" buyers ... they were all made to "sophisticated" investors. That is the rule ... and as far as I can see, that is what GS. Now whether or not the organizations holding themselves out to be "sophisticated" are competent or not is another question. Many have the certificate but maybe few have much sophisticated understanding ... and these people got it wrong for a lot longer than GS got it wrong.

The question of sophistication and competence goes a long way up and down the institutional structure. The performance of the "Fannies" seems to be based not on sophistication but advanced "dumbness" ... almost as bad as the performance of the Federal Reserve leadership. How so much "credit" could be created on top of such a poor underlying "balance sheet" of society defies all comprehension. Years ago there was a famous book called "Marketing Myopia" ... there needs to be a book called "Financial Myopia" starring the high profile titans of the financial sector who got things so wrong for so long ... as well as the damage done by ALL the actors in the sub-prime boom who were happy to be in the game for as long as the music played!

To its credit ... while GS got it wrong as well, unlike most of the institutions in the sector, it saw the problem it seems before everyone else, and acted prudently to extricate it from the mess. This is what is meant to happen in a market economy.

So now the next set of questions:

• What on earth was everyone else doing while GS was getting it right?
• How do we put CA metrics in play so that the public are better informed about what is going on?
• Rather than simply trying to "punish" Wall Street ... what can be done to help give opportunity back to the people on Main Street

From my perspective the need for better metrics has never been clearer. Old fashioned accountancy and the computation of money profits is good, and with social value metrics and a focus on community value adding can probably do the job that is needed. Metrics are NOT regulation ... they are merely the raw material for decision making. If money profit and greed are the only pieces of the game ... there will be outcomes like the bubble series that is the norm of modern economy, but if social value adding is also a part of the game, then the outcome can be sustainable ... and rapid ... progress.

Comments are welcome!

Peter Burgess

Goldman Sachs ... came out looking good!

Dear Colleagues

Yesterday (April 27, 2010) present and former executives from Goldman Sachs (GS) were grilled by US Senators on Capital Hill. My take on the day was that Goldman Sachs showed very clearly why they are good ... why they did not lose really badly when the housing market went sour while everyone else did.

Personally, I thought the CFO was the most impressive ... simply because he seemed to have a deep understanding of what his job was ... to preserve the assets of the organization while allowing the organization to earn money. The CEO was way better than I expected ... again, exhibiting a great clarity about why Goldman Sachs existed, to serve global customers, and make money doing it.

The Senators preoccupation with a series of issues that bother Main Street, but are the core of any working capital market was, in my view counterproductive. The GS people clearly knew how their markets worked ... and the Senators, it seemed, either did not get it, or did not want to get it.

In due course the US legislators are going to pass some legislation that will complicate the life of the capital markets, make things more difficult to work within the rules, and essentially make things worse.

The hearings made it abundantly clear that the behavior of the Wall Street Banks was not what messed up the US economy ... but the behavior of the whole value chain of wage and fee earners in the sub-prime housing boom. This was not addressed on Tuesday, but was in a previous hearing. The house building industry grew as fast as it could and made substantial profits ... more than was reasonable. Land owners sold land to builders ... and profited more than was reasonable. All the professional actors did their paperwork, collected fees, but probably did not do what they really should have been doing to identify the stupidity of what was going on. The community bankers and others did the mortgage origination and collected the fees. All of these steps were done in a way that created a huge fee machine ... and this system never ran out of gas, simply because all of the mortgage paper was able to be sold out of the local system into a national and international capital market that had also figured out how to make money out of this paper.

Capital markets are all about monetizing a real transaction using paper ... it is called, I think, securitization. It is a very convenient process, and on balance very valuable for a sane society.

GS, it seems, figured out early on that the sub-prime securitization process had gotten out of hand, so they changed direction and reduced risk in this segment of the capital market pretty early on. Others who did not identify the need for direction change, either failed, or are struggling and are on taxpayer funded life support. GS got it right ... and they balanced their book ... reduced exposure ... very rapidly. Their clients ... were still in the buy mode for these securities a long time after GS had changed direction. Their clients still saw gold in these complex securities, though GS itself had moved on. Seems smart to me ... and nothing here should be illegal.

In my view, the question of the rating agencies and how they do their rating is much more problematic. I used to do risk management as the CFO of a company ... and we reduced risk by making sure we operated safely. This was a physical idea, not merely papering over potential problems. My cost of insurance was reduced by around 67% ... and my exposure to risk reduced at the same time. Real risk reduction produced real cost savings. But the rating agencies seem to be doing risk reduction simply by playing statistical games ... and not surprising they got it wrong.

But the big takeaway from all of this was that the profit metric is a totally inadequate measure of performance for economic actors in society. There absolutely has to be a measure of social impact in the internal management metrics and in the reporting to stakeholders. My take is that GS performed exactly as it was meant to perform ... and did not lose huge amounts of money in the process, while almost every other actor in the economy lost money. All the "little guys" on Main Street were happy when they were earning fees from the economic activities that would end up in the crash ... and set the stage for the crash. Most of Wall Street crashed ... most of Main Street crashed. All this profit ... and no solid socio-economic benefit from very much of it. The metrics were inadequate!

The capital market is needed ... the capital market ought to be an efficient tool for getting the allocation of capital right. But clearly the simple "profit only" capital market is not getting funds allocated to important things in a way that works efficiently. A hybrid capital market where both profit and social value are in play will change the market in ways that are important ... and in my view can set the stage for a sane, smart society.

Peter Burgess

Global Health ... lots of workshops, but how much commitment to investment?

Dear Colleagues

There are a lot of health organization that have a public relations (PR) posture that suggests that there has been great progress with global health over the past few years ... or few decades.

In Community Analytics (CA) one of the measures of performance is "How much progress compared to what the progress could have been?". Using this as the measure almost everything to do with global relief and development is deep failure ... yet the institutions most involved with international official relief and development assistance (ORDA) are using PR to spread the word that they are doing great work.

From an analytical point of view most initiatives are either spending too much or not spending enough ... and the progress is mostly inconsequential. This is worse, because the possibility of doing things right and having great progress exists ... but progress is not happening.

Of course, a sweeping generalization of this type is not the whole story. There are some examples of absolutely amazing performance ... and there are lessons to be learned from these. In fact this is part the origin of CA itself!

The area of health ought to be making much more progress ... but the programs are not well designed. The results are poor because that is the program design ... and the results really do not matter since there are inadequate metrics to measure progress and performance. Look at the following workshop / panel series:

Launch of New Health Series ... March 4, 2010

The Global Health Council and Results for Development Institute will launch a new health series "New Visions for Improving Health Care in the Developing World" that will highlight global health initiatives in which strong analysis is being used to drive practical changes in health systems in developing countries. This series will include sessions in Washington, D.C., and New York City.

• "Civil Society: A Missing Link in Development" March 29, Washington
• "The Good, the Bad and the Ugly: The Private Sector's Role in Health" April 28, Washington.
• "Hidden Heroes: How Ministries of Health Can Drive Change" September, Washington.
• "What Would it Take to Get Universal Health Coverage around the World? Lessons from Countries on the Move" October, New York.
• "Pharmacist, Doctors, Nurses, Oh My! Solving the HR Problem in Developing Countries" November, Washington.

More information on these events by visiting the Results for Development website http://www.resultsfordevelopment.org/

The organizers of these presentations have some concern about performance.

Despite the tremendous progress that has been made in global health over the past two decades, there is still often a disconnect between thought and action. Researchers produce many papers that don’t find their way into practice, and implementers often carry out projects built on shaky policy foundations. This series will highlight examples in which strong analysis is being used to drive practical changes in health systems and improve health services for the poor. It will focus on promising areas for gains that earlier were neglected, bringing new actors and approaches to the center of global health.

The problem now is that a workshop and a highlight changes almost nothing. The way the system is scored needs to be changed ... and that is what CA is determined to do.

Peter Burgess

Haiti ... 3 months and accountability at near zero!

Dear Colleagues

It is now more than three months since the disastrous earthquake in Haiti. There has been a huge amount of effort expended to handle the rescue and the immediate relief ... and a huge amount of money and resources of various kinds mobilized.

But the accounting and the accountability is missing.

I understand that people working in the relief area are busy ... probably overworked and tired. However, I would argue that accountability is part of the job. There seems to be time for people to take photographs and collect "stories" but collecting enough data so that there can be some accounting for what has gone on does not seem to be taking place.

In my view this is a serious dereliction of duty. Most of the money being used has been raised by public donation ... mostly with an expectation that the money would be used to help with Haiti rescue and rebuilding. It is scandalous that most organizations are unable or unwilling to show ... other than in the most general terms ... what they have done with the money.

Many organizations are not doing bad things with the money ... but some are. With no accountability anywhere it is pretty clear that there is an opening for the bad organizations to raise funds and steal it! Within the big good organizations ... there are also opportunities for bad people to do bad things and not get caught. This is fundamentally wrong.

There is also the question of cost effectiveness. Some organizations are doing a lot with a little ... and other organizations are using a lot of money and not doing very much. With the lack of accounting and accountability it is very difficult to tell which organizations are cost effective and which are not.

A starting point for cost effectiveness is the remuneration structure of the various organizations ... those that pay nothing and those that pay quite high international salaries and benefits. Another cost is the overhead associated with these various staff grades ... their travel, their vehicles, their accommodations, their meals, their office support, etc. Some years ago the budget for a USAID staff person in the field was in excess of $200,000 a year. The UN staff were somewhat less ... but very high numbers compared to the per capital GDP of the country.

Which of course, brings us to the question of how to measure benefit and how to reduce cost. Benefit is all about what happens to the quality of life of the Haitian people. Cost is all about how money is used ... with least cost and most effective development getting derived from the work of Haitians themselves.

And then there is the question of profiteering. With no transparency ... no accountability ... some organizations are charging a lot for their services, and getting paid even though the prices are exorbitant. Profiteering in the face of humanitarian suffering is unconscionable, but I would not be at all surprised if it is not the norm both for many local contractors and for many international contractors.

If we had some accounting and accountability we might be able to see whether or not the leadership of the relief efforts have done anything at all to do things in a way that delivers the most and the least ... or whether it is merely "throwing" resources at the problem and hoping for the best.

I am absolutely appalled at the cavalier way in which accounting and accountability have been relegated to insignificance over the past few months. It is intolerable ... and, of course, with no accountability ... nobody is responsible.

Peter Burgess

Public-Private Partnerships

Dear Colleagues

Some people are impressed with the performance of Public Private Partnerships (PPPs) and want to expand their use ... but, like so many other "silver bullet" solutions, this one also is likely to be only a part of a solution.

There is ample evidence that the private sector has the ability to "run things" with more cost efficiency than the public sector. An independent study done in New York City at the end of the Koch Administration suggested that almost everything that was being done by the City administration was costing about 10 times what it would have cost being done in the private sector. My experience working with the World Bank, the UN and a variety of governments confirms that efficiency is not high up in the the public sector's priority list.

But while it is clear that the private sector is good at doing things ... it is only good at doing things it wants to do. If the private sector is not interested in something ... then this matter is going to get ignored. The private sector rarely has the public good as a high priority in its decision making.

A PPP is only going to work when the objectives of both the public partner and the private partners are well aligned. This can happen. At the moment in New York City there are many PPPs that are being very successful in improving the public space in various areas of the city. The private sector ... the businesses in the area benefit from a better neighborhood ... the city needs to do it, but does not have the resources ... the PPP mobilizes resources essentially from the private sector and the job gets done ... and the private sector business community gets benefit. Quality of life is improved. Everyone wins.

Over the past 20 years the center of New York has been transformed from an ugly, dirty, urban, drug infested mess to a much more attractive clean historic and modern area with everyone ahead. Much of the work has been done by the area PPPs. The transformation of Central Park has been facilitated by another PPP ... and what was a dangerous run-down facility 30 years ago is now one of the world's finest big urban parks.

The fact of success of PPPs in doing area improvement work should not be generalized into the PPP being the way to do a whole lot of other things. The work of area improvement has a public and a private goal that is very much aligned. In these cases, the work of the PPP produced a benefit and not a profit ... and the private community in turn could profit from the benefit.

This is in contrast to a PPP to run, for example, prisons. A private for profit operation of a prison may be a PPP, but it may well turn out to fail. The goals of the private operator and the goals of the public sector in this case are not sufficiently aligned. I cannot imagine how, in the long run, a PPP running a prison will satisfy both the public and the private parties.

The PPP is a form of organization that has potential to improve socio-economic performance and improve the quality of life ... but not doing everything everywhere.

Peter Burgess

World Malaria Day ... How much has already been wasted?

Dear Colleagues

World Vision has reminded me that today is World Malaria Day. This day is now entrenched as a day when those that are involved with international relief and development make a pitch for more money to fund ongoing malaria control work.

Several years ago an amount of around $100 million was being disbursed annually to support malaria control programs ... now the total is more than $2 billion a year, a not inconsequential amount.

As I cost accountant, I am very concerned that nobody seems to know very much about how much things cost and what impact is being achieved from resources consumed. The organizations engaged in this work seem to have a very weak understanding of the cost of what they are doing and the effectiveness of the initiatives. That is not to say that the people involved are not well educated ... they have PhDs, they are MDs or have the MPH education ... but in the main, they are not cost accountants. From my perspective, they all seem to think that cost accounting is "beneath" them ... but that should not excuse them from knowing absolutely essential management information!

Many organizations like World Vision, MalariaNoMore, NothingbutNets ... not to mention the Presidents Malaria Initiative (PMI) and the Global Fund for Aids Tuberculosis and Malaria (GFATM) have done a lot of their work on the basis that modern insecticide treated bednets are a cost effective way of saving lives ... and now there is a lot of pamphleteering about the success of programs that have used bednets in various malaria endemic countries ... but little of this PR material seems to be based on credible data about the performance of bednets and the cost effectiveness of this intervention.

It is fairly clear that after spending more than $2 billion a year, there is some reduction in the burden of malaria ... but it is far from clear whether we are getting "our money's worth"! Nobody seems to have data that is very satisfying to a cost accountant ... though many of the beneficiary governments around the world and implementing agencies like PSI, RTI and many others have convinced the donors that they are doing effective work. This is accomplished mainly by story telling and tiny bits of data that get major statistical manipulation to show performance. As a cost accountant, this methodology is not credible ... and should be discounted.

I want to see the burden of malaria reduced ... and from what I know of medical science, entomology and cost and management accounting ... the way we are going about it will end up costing a lot more than it should, and quite quickly become unsustainable. This is a development train-wreck waiting to happen ... and one could add "with the engineer in charge texting"! The costing may not be very simple, because the best programs are ones where there are multiple interventions, with variations depending on the physical circumstances of the place ... but the fact of this modest complexity does not excuse the managers from knowing something about how much things have cost and how much impact there has been.

How does one make an impression on the big organizations that are engaged in the international relief and development industry ... but do not want to come into the modern world when it comes to the metrics of socio-economic performance ... and therefore end up funding programs that cost more they should and do less than they should!

The following is the text of the e-mail I received from WorldVision today suggesting I send money for bednets ... I don't think so!

Peter Burgess

//////////////////////
---------- Forwarded message ----------
From: World Vision
Date: Sun, Apr 25, 2010 at 2:04 PM
Subject: Give bed nets on World Malaria Day!
To: peterbnyc@gmail.com

IT'S THE DEADLIEST PREDATOR IN AFRICA.

Give long-lasting insecticide-treated bed nets to protect children's lives.

Dear Sponsor,

Today is World Malaria Day. This disease kills nearly 1 million people each year; 85 percent are children under the age of 5. Hitting Africa the hardest, malaria is the top killer of children in many of the places where World Vision works. Join us in our efforts to end malaria.

Effective and inexpensive tools make malaria both preventable and treatable. Tragically, simple solutions such as treated bed nets are often inaccessible to the people who need them most. Today, you can help change that.

Through our Operation Safety Net program, World Vision is distributing long-lasting insecticide-treated bed nets in Africa, but we need your help.

Your gift of $18 today will provide 3 long-lasting insecticide-treated bed nets. That's enough to protect an entire family from this deadly disease.

Please send a generous gift to provide bed nets to help end malaria in Africa. And please remember to pray for children and families in communities hit hard by this disease. Your prayers can make a difference.

Every day, malaria kills more than 2,000 children. No one should die from a mosquito bite.

God bless,

Rich Stearns
President, World Vision U.S.

World Vision United States — Building a Better World for Children
World Vision is a Christian humanitarian organization dedicated to working with children, families, and their communities worldwide to reach their full potential by tackling the causes of poverty and injustice.

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Markets ... are they an efficient way to allocate resources?

Dear Colleagues

I have done assignments in communist economies where the transactions of the economy were controlled by "apparatchniks" ... and have seen the economic devastation which over time completely wrecked production and created poverty. I have memories of stores where nothing was on the shelves ready to be purchased ... absolutely nothing.

The contrast between these empty stores in the communist economic model and the overflowing abundance of the shelves of supermarkets and the hypermarkets that are common in the capitalist market economies is worth having in mind as one discusses the performance of the modern global economy.

In other words ... allocation of resources by bureaucrats is not a great solution ... much better to have a market mechanism to be invoked to get a good allocation of resources.

Having said that, whether markets are allocating resources efficiently is still a legitimate question ... and for me, the answer to this question is clear. Markets are allocating resources efficiently but badly. Because markets are working with an inadequate set of data about economic performance ... a set of data that has a lot to do with corporate profit, and almost nothing about social well-being ... markets are optimizing resource allocation to maximize profit and not taking any notice of the way society as a whole is being gutted!

Essentially no market metrics take into account the importance of taking care of the human resources and the natural resources ... and the commons! Corporate infrastructure that makes profit is in play ... but public infrastructure that deteriorates and falls down is not part of the market that ought to be allocating resources well.

It would not take a lot to have the people who talk about corporate profits, and stock market prices and GDP growth to also talk about the value adding for society that is associated with corporate activities. A lot of work has been done on the double bottom line and the triple bottom line ... but nobody is taking any notice. Why is this?

I do not know the answer to this question, but I have some thoughts! Maybe it is because some of the very profitable organizations are achieving much of their profit from actions that have a huge impact on society ... a huge component of value destruction for society. There are big money profits to be made by moving corporate production from a high wage location to a low wage location ... and the profits are on the record, but the value proposition from the perspective of society is ignored and not part of any routine reporting framework.

Another thought! Part of the reason why the double and triple bottom line reporting methodologies are ineffective may be that they have no focus. When there are multiple measures, a person with a decision making responsibility has to choose the one that is the most important in the day to day work ... and profit performance is the one that must get primary attention inside the corporate structure. However, if the reporting about social impact was based on impact in a specific community, with the community as the reporting entity, the issue of impact is now very clear. Whether or not the corporate entity makes profit becomes secondary.

Another issue is that there is a disconnect between the profit proposition that drives activities within a corporate environment and the impact on society. This has become especially evident in the banking and financial services sector ... where corporate profit and staff remuneration is very important ... and the value proposition for society has no role at all.

What exists at the moment does not work. The data about social impact performance is missing from the dialog ... the data are missing ... the analysis is missing. With social impact not part of the data that is driving markets, it is very clear that there is going to be a good outcome for profit, but a bad outcome for society.

As an accountant I see a systemic problem in much of the data and analysis ... transactions that earn fees are good because the fees seem to be legitimate profit contribution for the organization. But in reality the fee is merely reducing wealth somewhere ... maybe it is in the organization's balance sheet, but more likely it is in someone else's balance sheet. This is what happened with the sub-prime lending spree ... everyone was earning fees ... and in the end the balance sheets of both the original client and the top-of-the-pyramid financial institution had toxic balance sheet damage!

This would not have been possible if the accountancy profession had done its job ... but it would appear that the accountancy profession has been to sleep along with a lot of other people who should have been engaged.

Accountancy is at the center of the data problem ... but data must now include the value dimension. This is what Community Analytics (CA) starts to do ... and why the CA methodology needs to be widely embraced. Corporate leadership and market makers have to be accountable for more than merely making profit ... they are also responsible for the society in which they live and work.

With both money profit and social value data markets will be efficient and do good resource allocation. This is what markets do. They can handle a lot of chaos and a lot of options and a lot of data and analysis ... and in the end people do their best to figure out something that seems to make sense. There may be tension between corporate profit and social good ... but data and analysis about BOTH will end up giving good outcomes.

Peter Burgess

Speaking truth to power

Dear Colleagues

As far as I can tell, human character has not changed very much over the past several thousand years. The structure of society does not change very much ... the dynamic of greed remains a core part of the decision making process.

Increased education helped to change things, but not as much as might have been expected. There are, of course, notable exceptions, like Mahatma Gandhi who spoke out and changed the power profile of the British Empire. Martin Luther King spoke out against racial segregation in the United States and changed another power establishment. Nelson Mandela was another figure that spoke truth to power and changed the trajectory of South Africa.

But in the main ... the people with money, power and influence get to do what they want on their own terms, without much interference from those who know what would be better, but do not have the courage to speak or the platform to get heard. The powerful establishment can pay for support ... and in turn have more money to buy more support. Those that know what would be better are not part of the dialog, and to the extent they get close ... speaking truth to power may not be good for their health.

Most poor countries could have much better socio-economic outcomes if the governance was better, the policies were better and corruption was eliminated ... but this would cause disruption to the elite economic oligarchy, including powerful international corporate interests.

Maybe there is light at the end of the tunnel. The socio-economic performance of Singapore going back to the 1960s can teach some lessons. Good governance ... good policies ... no corruption and a strong collaboration with global corporate organizations that integrated with all the domestic socio-economic agenda of the country and there has been 50 years of good progress.

Brazil, Russia, India and China have morphed in socio-economic terms over the past 20 years ... better governance, better policies, less corruption and an integration of local and international economic actors has produced good progress.

But some countries are still constrained by the straitjacket of their power elites who control everything ... and though this may benefit the oligarchy, society as a whole pays the prices. Countries that are in this situation need help ... but they rarely get it.

Over several decades, I have been disappointed at the ineffectiveness of organizations like the World Bank and the IMF in addressing this effectively ... as well as the major multinational corporations ... as well as bilateral government agencies ... as well as the well-meaning NGOs. I am not sure why this disappointment ... but it is probably because few are willing to stand up and speak truth to power. Better not to rock the boat ... better to tolerate what exists because by standing up things might be aggravated.

I know the World Bank has never taken kindly to criticism of its projects ... nor the United Nations ... nor any of the bilateral development agencies. Since these are the organizations that fund much of the relief and development industry ... speaking truth to these organizations is career suicide. It is not, therefore, surprising that they do not get to hear much of the critical analysis of their work ... which explains, in fact the observation made by Dambisa Moyo in her book Dead Aid about development assistance for Africa: "Sixty years and a trillion dollars and little to show for it ... there has to be a better way!".

There are better ways ... but there has to be some courageous "speaking truth to power".

Sincerely

Peter Burgess

Microfinance ... the dialog about social value and profit performance!

Dear Colleagues

The dialog about microfinance performance keeps on going ... and for good reason. The following post which can be found at:
http://compassioninpolitics.wordpress.com/2010/04/22/possible-pitfalls-of-mixing-charity-and-business-in-microfinance/ is an example:

Possible Pitfalls of Mixing Charity and Business in Microfinance
April 22, 2010

The following a guest post by Fehmeen who blogs at Microfinance Hub. Fehmeen points for the need for a balance of compassion and accountability. Too much of either risks the financial stability for the micro-finance client or the donor organization.

It has been established and accepted that microfinance needs to work in the form of a business rather than charity because:

• Microloans allow entrepreneurs to build credit histories to access commercial financial services
• Most micro entrepreneurs are dignified and would not prefer cash handouts accompanied with sympathy
• The business model is financially sustainable.

At the same time, microfinance institutes (MFIs) need to incorporate a social dimension in their operations and this is often a difficult balancing act considering the lack of corporate governance and experience of certain institutions. While some of them completely lose touch with their social objective, others forget that the microfinance model needs to be financially sustainable at the end of the day.

At one end of the spectrum lies the story of Bidi Mehidana, an Indian villager who became trapped in a spiral of easy debt after the pre-mature death of her cow, which she had bought with her microloan. The bank refused to sympathize with this unexpected calamity and turned down a request for another loan, yet continued to charge her interest on the defaulted amount. To make matters worse, Bidi was constrained to borrow another fortune from a loan shark. You can see the details of her story here.

Grameen Bank’s approach is noticeably different: since Bidi had little control over the death of her cow, her debt may have been rescheduled, or paid for by an emergency fund set aside for this very purpose. At the same time, her request for a new loan (on easier terms) would be approved, but at the cost of clearing away any credit history she had previously earned.

At the other extreme lie MFIs with improper delinquency management through risk-assessment tools and loan-recovery systems, which are a function of corporate governance. This may not seem much of a problem but as Professor Yunus puts it, ‘credit without strict discipline is nothing but charity’. Therefore, in the absence of strict obedience, micro entrepreneurs may perceive it is acceptable to default on payments, which makes the MFI financially unsustainable. Even though MFIs may end up loosening internal controls to improve their profits, they unwittingly set aside financial objectives for the sake of social gains.

This predicament balancing social and financial motivate applies to all MFIs but most manage to find their equilibrium through experience. Nevertheless, the existence of this quandary, one of many challenges for MFIs, simply goes to prove microfinance is more complex than we generally imagine.

The guest blogger, Faheem, gets it right when he talks about balance between compassion and accountability ... but the problem is that there are well accepted metrics about the money accounting and very weak metrics about the social dimension of microfinance activity.

My experience suggests that microfinance has a big role in social value adding, though not as big an impact perhaps on sustainable progress out of poverty.

The value analysis of Community Analytics (CA) suggests that high performance profitable MFIs are less social value adding than those that might struggle financially but are important to their clients.

The trouble is that CA style value analysis is not widely used ... so in the space where metrics dominate, it is only the for profit performance metrics that are given consideration. This is setting the stage for disaster in the MFI space in due course.

Peter Burgess

Dear Colleagues

I tried to post the following into the ReliefWeb comment section yesterday in connection with an article they had posted about Haiti, the pledging conference and donors and disasters.

The appalling lack of accountability

Dear Colleagues

I am 70 years old, well trained, experienced and mad as hell. The state of accounting and accountability is appalling ... with everyone talking and nobody doing much that is effective. Nobody seems to have a clue where so much money has been consumed!

I was first associated with international relief and development assistance (ORDA) activities in the early 1980s. In a varied career have been a corporate CFO, cost accountant and factory manager ... as well as doing assignments in a variety of international situations. I know how powerful good accounting and management information can be.

But I am appalled at the state of accounting and accountability in the ORDA community ... in the past and continuing now. Why is transparency and accountability talked about so much? Why is accountability never done? The current situation in Haiti is an accountability mess. A little progress in understanding how much money has been mobilized ... but little or nothing on where these moneys have gone and what has been accomplished. At best, someone will try to lock the stable door when all the horses have gone! This is foolishness at its best!

How might the problem be addressed? ReliefWeb postings are helpful ... but they are a piece of the journalistic framework. We need an accountability framework ... and one that is totally accessible to the public.

My attempts to connect with major users of resources to talk about the accountability issue have gone nowhere ... and others report the same.

Good accounting and accountability are not difficult ... and they solve a big part of the corruption problem ... but they do require commitment from the top of organizations which has been sadly missing for the best part of the last 25 years!

What can I do? What can we do?

Peter Burgess

 I’m mad as hell!

Tell me when someone answers.
The more people who ask this question, the more it gets noticed.

This is the explanation that I have been given

02:37 PM from Shuichi
Removed this topic
Reason: This forum is for discussing ReliefWeb's services. As much as we would like to help fellow humanitarians, the issue raised in this topic is not within our control. Please help keep this forum focused.

I was given the opportunity to file a dispute, and I have done so. I have filed the following. It may be that the point in my last sentence is the reason they have chosen to remove the post, in which case they can put it in the correct place!

Dear Colleagues

ReliefWeb is, as I understand it, a part of the Fourth Estate and therefore an important part of the system of governance and a part of the essential structure of accountability. My comment was, I believe, a perfectly appropriate comment about something that has huge relevance to the current situation in Haiti and totally related to the subject of the article you had seen fit to post.

I am pleased to note that accountability is being talked about. This is a perfect example of why accountability does not actually get acted upon.

I would add that a related UN publication ... IRIN (published by OCHA) ... raises a lot of great issues but in a way that freezes out follow up so that the issues raised might be addressed by a broader public. IRIN won't answer messages about this issue either.

Now there might be a technical reason what this confrontation is developing ... and that is that when I tried to do a "comment" on the article there was a technical glitch and I was diverted as a courtesy to another part of your (or ReliefWeb's) website. If the problem is merely that my observation is in the wrong place, please will you help me get it to where it belongs?

In any event this matter is about billions of dollars, and I am not going to be quiet when so much money ought to be the subject of excellence in accountability.

Peter Burgess
http://communityanalyticsca.blogspot.com

The following is the essay that started this exchange. I think many of the points being made by Salvador Sarmienta are absolutely right ... but up to now there is little of no evidence that the quality of accountability will change for the better following the Haiti disaster.

Of Donors and Disasters
Source: Center for International Policy (CIP)
Salvador G. Sarmiento | April 20, 2010

When representatives from 136 countries attended the high-level International Donors' Conference in New York on March 31, it looked like good news for Haiti. The conference, co-hosted by the United States and the UN, garnered commitments of large sums from donors and called for coordination with the Haitian Government, charged with leading the efforts. In total, donor states publicly pledged over $9.5 billion to be disbursed over 10 years.

These donor commitments are important. But previous donors' conferences for Haiti indicate there is more to this process than pronouncements, and many steps must be taken before aid gets to where it is needed most. Huge sums were also ceremoniously promised at donor conferences in 2004 and 2009. Following the April 2009 conference, only 30% of pledges had been disbursed almost a year later when the earthquake struck.

Contrary to stereotypes, these missing funds did not disappear into the depths of a corrupt Haitian government, but evaporated when international partners simply failed to follow through on their obligations. At the March 31, 2010 conference, UN Special Envoy Bill Clinton publicly acknowledged his own failure to collect money pledged in the past, and emphasized the importance of follow-through on international commitments.

Poor communication, unclear avenues for aid delivery, and a lack of uniform reporting contributed to this dismal record. Absent adequate monitoring and coordination, it is difficult to assess how aid is used and how effective its impact. Foreign assistance that respects the human rights of the Haitian people will require donors to agree to apply the principles of transparency, recipient participation, and alignment with Haitian government priorities to ensure aid effectiveness.

Good Intentions, Poor Follow-Through

The enormous outpouring of solidarity with Haiti that began after the earthquake struck the island on Jan. 12 could still be felt in March in New York City. Yet, despite all the good intentions of donors at the conference, the recent history of aid to Haiti raises serious questions about whether donors' measures and the millions of dollars behind them will translate into meaningful improvements in the lives of most Haitians. The existing means and machinery for providing assistance lags far behind the rhetoric. The complexities of the on-the-ground situation and the often conflicting interests involved in establishing post-disaster development projects make old habits hard to break.

The need for direct budgetary support is one example. Leading up to the conference, several donor government officials cited incapacity or corruption of the Haitian government as a reason not to provide direct funding. But reflection on the recent history of donor assistance to Haiti would help critics understand why, in the context of billions of dollars pledged over the years, Haitian public infrastructure remains weak.

First, as noted above, a huge proportion of the funds pledged were never delivered. Moreover, international aid donors have actually contributed to eroding the public administrative capacity that they now seek to restore post-earthquake. The standard practice of bypassing Haitian institutions has created private and NGO structures that supplant the role of the government, diverting both human and financial resources away from the public sector. Not surprisingly, a government structure to coordinate and ensure accountability for aid projects is non-existent. Together, the lack of public information about aid to Haiti and the large parallel systems create severe accountability problems. With no one checking on the status of projects left unfinished or investigating projects causing harm to communities, Haitians have no meaningful avenues for input or redress.

Unreliable funding and parallel structures have systematically undermined the Haitian government's capacity to assess and coordinate aid, and consequently, of ensuring rights-respecting assistance to Haiti. Donors at the March conference spoke of Haitian ownership and leadership, yet said little about providing funding through the Haiti Multi-Donor Reconstruction Fund, which would ensure alignment with Haitian ministries and facilitate a more accurate monitoring and accounting of assistance. With the exception of very few donor states, including Brazil, Spain, France, and Venezuela, most donor states were unwilling to publicly make commitments to either the Multi-Donor Fund or direct budgetary support.

Donors' rhetoric at the UN conference reflected a recognition of the challenges described above, but the declarations were not matched by specific changes in aid provision. The magnitude of devastation in Haiti demands that donor actions live up to their rhetoric; at stake are people's rights to the most basic of human necessities—access to food, clean drinking water, and a decent quality of life.

U.S. food aid, as currently structured, provides a good example of counter-productive policy that can be improved upon. When donated under Title II of the Food for Peace Act, food aid is subject to the conditions that it be purchased in the United States and that 15% be sold in the recipient country. Instead of helping Haitians grow their own food, these requirements gradually shift eating habits toward external products and undercut domestic food production. Since the earthquake, there has been an important effort by the United States to shift a portion of funds to allow for the purchase of food in Haiti. However, supporting temporary local purchases falls short of the needed support and protections required for Haitian producers to thrive next door to some of the most heavily subsidized agriculture in the world.

That many of these problems already occurred prior to the earthquake, in a "non-emergency" context, underscores the importance of monitoring the assistance pledged to Haiti at the conference. With these large sums of money and the well-being of millions on the line, assistance must be done right. It involves compiling data from two dozen countries, each with somewhere between 1 and 20 governmental agencies involved with distinct accounting and reporting systems, any number of NGOs or private contractors playing various roles in carrying out the projects, which can, in turn, hire sub-contractors. Addressing this complexity and multitude of actors will require donors to break with the current mode of operation so that, in the long term, Haitian institutions can conduct appropriate monitoring and coordination.

Donor states have agreed that coordination, transparency, accountability, and participation are paramount, and have pronounced so in the widely adopted Paris Declaration on Aid Effectiveness (2005) and Accra Agenda for Action (2008). But whether donor assistance is rights-respecting will depend on how and whether these principles are applied. This means implementing the necessary mechanisms to determine what impact aid is having on the ground. Such mechanisms might include a multi-donor fund, as used in Aceh and Afghanistan, that would integrate meaningful representation from Haitian civil society and grassroots networks, together with adequate technical and budgetary support from donors. Other options include a publicly accessible aid monitoring database or a forum to ensure grassroots community participation and input into how the money is being used. Former President Bill Clinton's remarkable admission that he had failed at one of his primary responsibilities as UN Special Envoy to Haiti—to ensure the disbursement of donor pledges from the 2009 Donors' Conference—should serve as a warning. If we cannot muster the political will to do things differently than we have in the past in Haiti, we will have failed as well.

Salvador G. Sarmiento is an advocacy officer at the Robert F. Kennedy Center for Justice & Human Rights and a contributor to CIP Americas Program (www.americasprogram.org.
/////////////////////////
With the exception of public UN sources, reproduction or redistribution of the above text, in whole, part or in any form, requires the prior consent of the original source. The opinions expressed in the documents carried by this site are those of the authors and are not necessarily shared by UN OCHA or ReliefWeb.

The big question of remuneration

Dear Colleagues

There is outrage in the Main Street of the United States and in the real ... that is non-financial services sector ... of the global economy, about the very high remuneration being handed out to the stars of the financial organizations.

A forum featuring national experts on corporate compensation is convening in Washington early in May to discuss "Executive Compensation: what should we do?". It is being organized by the Economic Policy Institute and the Center for the Study of Poverty and Inequality at Stanford University

The organizers introduce the issue as follows:

Executive compensation has risen enormously since the 1970s, as has the body of research investigating the reasons for its sharp ascent. But only now in the midst of the "Great Recession" has this rise in compensation come to be widely seen as problematic. Has the rise in executive compensation come at the expense of rising living standards for lower wage workers? And if so, what role should public policy play in reforming the system?

... SNIP SNIP ...

The event is a debate of what forces lie behind skyrocketing executive pay, as well as what, if anything, policy makers should do to turn things around. After the presentations, speakers will take questions from the audience.

I have to say, I take issue with the idea that it is only in the midst of this "great recession" that the matter had become problematic. It may be true that it is only in this circumstance that the media has seen fit to talk about it ... but it is inherently a very bad situation that is not in the interest of society at all ... and has been growing in importance for decades!

No question in my mind that people should be adeguately remunerated ... indeed well remunerated. However, this is a complex matter, and in need of massive reworking!

The differential in remuneration between Main Street and the stars of Wall Street is a structural flaw in how society works that is in need of correction. The forum will address the question "What should we do?". I am not optimistic that anything substantial will emerge from the dialog in large part because the issue is being addressed without looking at the broader context of remuneration in other places and at other times.

Having done assignments in more than 50 economies, I have come to the view that the differential in remuneration between different places is a great structural flaw in our global society ... yet studiously ignored by the practitioners of development and, it seems, the academic community. Most "experts" in development who work as consultants or are employed by institutions like the United Nations or the World Bank are paid very well. They advise on policy issues and initiatives to help people in the lowest tier of the global remuneration pyramid and it seems that they are are not anxious to raise the remuneration question. It would ruin a lot of career and retirement plans!

Remuneration is at the heart of nearly every major argument in society.

The health care debate in the USA is at its core about how much money is going to be available to pay big money to the decision makers or stars of the medical sector ... after paying as little remuneration as possible to other staff in the sector ... and not bankrupting society in the process!

From the perspective of Community Analytics (CA), the problem of remuneration needs to be put in a framework that is both dynamic and comprehensive. CA argues that there has to be a change in the way the game is scored, so that there can be a change in the way the game is played.

CA is all about metrics. At the moment the only measures that are used in the allocation of resources and the "cheer leading" of the business media is "money profit". The measurement of money profit is ubiquitous and a whole sub-structure of analysis has developed around the drivers that result in producing money profit. In this money profit ecosystem, it is possible to argue that the stars of finance should be remunerated well, just as one can argue that stars in sports or entertainment should be remunerated well. But the existing money profit metrics system is fatally flawed because it totally ignores the value impact of economic activities.

CA adds a second framework of metrics to bring in the value dimensions. CA addresses the question of whether the economic activity produce social value adding or does the activity end up neutral or causing value destruction. People who are engaged in activities that are value adding deserve good remuneration ... whether or not the activity is a "profitable" activity or not. Activities that are value neutral or value destroying might as well not exist!

A framework of metrics that has profit and value will end up giving a fundamentally different profile for remuneration than the one that now exists ... it changes the profile of remuneration in poor communities and it changes the profile of remuneration in much of the rich community.

Changing metrics is not "anti-market economics" ... in fact it is pro-market. However, CA brings better information to the market and releases the market from the straitjacket of just profit metrics. Opposition to better information will be huge because what exists at the moment is a market system that is "rigged" in favor on profitable money manipulation at the expense of activity in the real economy where results include good outcomes for society as well as more modest profit.

Money profit optimization without taking into consideration the value for society is bound to cause a mis-allocation of resources. I don't think anyone has added up the cost to society of the dumb way bankers have allocated so much money to making profit that had, at best, no social value adding, and as it turned out, huge risk for society.

The question of remuneration gets at the heart of whether or not there is going to be structural unemployment in the United States, Europe and other places or not. The issue of remuneration is central to the subject of immigration. Abject poverty is largely a result of remuneration profiles that are wrong ... and solutions that have not worked. Remuneration is a very important issue ... huge ... and not very much on the radar other than for the headliner about banker remuneration.

I do not expect to be at the forum ... though it might be interesting!

Peter Burgess

PS These are the people who will participate:
Introduction
Christopher Wimer,
Associate Director, Collaboration for Poverty Research, Stanford Center for the Study of Poverty and Inequality
Moderator
Lawrence Mishel,
President, Economic Policy Institute
Speakers:
Robert Frank,
Henrietta Johnson Louis Professor of Management and Professor of Economics, Cornell University
Jesse Fried,
Professor of Law, Harvard Law School
Alex Edmans,
Assistant Professor of Finance, The Wharton School, University of Pennsylvania

Haiti ... Accountability and donors coming through with their pledges

Dear Colleagues

You may be aware of the ReliefWeb service. They have posted an interesting essay by Salvador G. Sarmiento about the history of donor support to Haiti and the possible problems that might derail the disbursement of pledges this time round. The essay titled Of Donors and Disasters is posted at: http://reliefweb.int/rw/rwb.nsf/db900sid/VDUX-84QSKU?OpenDocument&rc=2 Salvador G. Sarmiento is with the Center for International Policy (CIP). A copy of the essay is set out below.

I have responded to this essay in the ReliefWeb comments and questions section. This is the URL: http://getsatisfaction.com/reliefweb/topics/the_appalling_lack_of_accountability

Two pieces of my background motivate me to get involved: (1) I know something of how it is possible to move donors to make good on their pledges; and, (2) I know how powerful accounting can be, and I have used accounting in three separate environments: Government Financial Management; Corporate Accountancy; and in the Relief and Development Sector.

In the case of donors making good on their pledges I was seconded to the Government of Namibia after their successful pledging conference to act as aid coordinator because every single donor did absolutely nothing until we mounted a massive follow up effort. Even then, the donors tried to get away with projects that did little for Namibia, but simply had good PR value within their own domestic politics. Not very helpful!

In the case of accountancy, I did work at one time with the Government of Barbados who were rigorous in their accounting and balanced their "books" to the penny daily. In several countries, I have advocated for and worked out how the Ministry of Finance can effectively manage donor fund flows rather than having each fund flow separately accounted for by the "projects".

Here is what I wrote:

The appalling lack of accountability

Dear Colleagues

I am 70 years old, well trained, experienced and mad as hell. The state of accounting and accountability is appalling ... with everyone talking and nobody doing much that is effective. Nobody seems to have a clue where so much money has been consumed!

I was first associated with international relief and development assistance (ORDA) activities in the early 1980s. In a varied career have been a corporate CFO, cost accountant and factory manager ... as well as doing assignments in a variety of international situations. I know how powerful good accounting and management information can be.

But I am appalled at the state of accounting and accountability in the ORDA community ... in the past and continuing now. Why is transparency and accountability talked about so much? Why is accountability never done? The current situation in Haiti is an accountability mess. A little progress in understanding how much money has been mobilized ... but little or nothing on where these moneys have gone and what has been accomplished. At best, someone will try to lock the stable door when all the horses have gone! This is foolishness at its best!

How might the problem be addressed? ReliefWeb postings are helpful ... but they are a piece of the journalistic framework. We need an accountability framework ... and one that is totally accessible to the public.

My attempts to connect with major users of resources to talk about the accountability issue have gone nowhere ... and others report the same.

Good accounting and accountability are not difficult ... and they solve a big part of the corruption problem ... but they do require commitment from the top of organizations which has been sadly missing for the best part of the last 25 years!

What can I do? What can we do?

Peter Burgess

This is the original essay as posted on the ReliefWeb website.

Of Donors and Disasters

Source: Center for International Policy (CIP)
Date: 20 Apr 2010
Salvador G. Sarmiento | April 20, 2010

When representatives from 136 countries attended the high-level International Donors' Conference in New York on March 31, it looked like good news for Haiti. The conference, co-hosted by the United States and the UN, garnered commitments of large sums from donors and called for coordination with the Haitian Government, charged with leading the efforts. In total, donor states publicly pledged over $9.5 billion to be disbursed over 10 years.

These donor commitments are important. But previous donors' conferences for Haiti indicate there is more to this process than pronouncements, and many steps must be taken before aid gets to where it is needed most. Huge sums were also ceremoniously promised at donor conferences in 2004 and 2009. Following the April 2009 conference, only 30% of pledges had been disbursed almost a year later when the earthquake struck.

Contrary to stereotypes, these missing funds did not disappear into the depths of a corrupt Haitian government, but evaporated when international partners simply failed to follow through on their obligations. At the March 31, 2010 conference, UN Special Envoy Bill Clinton publicly acknowledged his own failure to collect money pledged in the past, and emphasized the importance of follow-through on international commitments.

Poor communication, unclear avenues for aid delivery, and a lack of uniform reporting contributed to this dismal record. Absent adequate monitoring and coordination, it is difficult to assess how aid is used and how effective its impact. Foreign assistance that respects the human rights of the Haitian people will require donors to agree to apply the principles of transparency, recipient participation, and alignment with Haitian government priorities to ensure aid effectiveness.

Good Intentions, Poor Follow-Through

The enormous outpouring of solidarity with Haiti that began after the earthquake struck the island on Jan. 12 could still be felt in March in New York City. Yet, despite all the good intentions of donors at the conference, the recent history of aid to Haiti raises serious questions about whether donors' measures and the millions of dollars behind them will translate into meaningful improvements in the lives of most Haitians. The existing means and machinery for providing assistance lags far behind the rhetoric. The complexities of the on-the-ground situation and the often conflicting interests involved in establishing post-disaster development projects make old habits hard to break.

The need for direct budgetary support is one example. Leading up to the conference, several donor government officials cited incapacity or corruption of the Haitian government as a reason not to provide direct funding. But reflection on the recent history of donor assistance to Haiti would help critics understand why, in the context of billions of dollars pledged over the years, Haitian public infrastructure remains weak.

First, as noted above, a huge proportion of the funds pledged were never delivered. Moreover, international aid donors have actually contributed to eroding the public administrative capacity that they now seek to restore post-earthquake. The standard practice of bypassing Haitian institutions has created private and NGO structures that supplant the role of the government, diverting both human and financial resources away from the public sector. Not surprisingly, a government structure to coordinate and ensure accountability for aid projects is non-existent. Together, the lack of public information about aid to Haiti and the large parallel systems create severe accountability problems. With no one checking on the status of projects left unfinished or investigating projects causing harm to communities, Haitians have no meaningful avenues for input or redress.

Unreliable funding and parallel structures have systematically undermined the Haitian government's capacity to assess and coordinate aid, and consequently, of ensuring rights-respecting assistance to Haiti. Donors at the March conference spoke of Haitian ownership and leadership, yet said little about providing funding through the Haiti Multi-Donor Reconstruction Fund, which would ensure alignment with Haitian ministries and facilitate a more accurate monitoring and accounting of assistance. With the exception of very few donor states, including Brazil, Spain, France, and Venezuela, most donor states were unwilling to publicly make commitments to either the Multi-Donor Fund or direct budgetary support.

Donors' rhetoric at the UN conference reflected a recognition of the challenges described above, but the declarations were not matched by specific changes in aid provision. The magnitude of devastation in Haiti demands that donor actions live up to their rhetoric; at stake are people's rights to the most basic of human necessities—access to food, clean drinking water, and a decent quality of life.

U.S. food aid, as currently structured, provides a good example of counter-productive policy that can be improved upon. When donated under Title II of the Food for Peace Act, food aid is subject to the conditions that it be purchased in the United States and that 15% be sold in the recipient country. Instead of helping Haitians grow their own food, these requirements gradually shift eating habits toward external products and undercut domestic food production. Since the earthquake, there has been an important effort by the United States to shift a portion of funds to allow for the purchase of food in Haiti. However, supporting temporary local purchases falls short of the needed support and protections required for Haitian producers to thrive next door to some of the most heavily subsidized agriculture in the world.

That many of these problems already occurred prior to the earthquake, in a "non-emergency" context, underscores the importance of monitoring the assistance pledged to Haiti at the conference. With these large sums of money and the well-being of millions on the line, assistance must be done right. It involves compiling data from two dozen countries, each with somewhere between 1 and 20 governmental agencies involved with distinct accounting and reporting systems, any number of NGOs or private contractors playing various roles in carrying out the projects, which can, in turn, hire sub-contractors. Addressing this complexity and multitude of actors will require donors to break with the current mode of operation so that, in the long term, Haitian institutions can conduct appropriate monitoring and coordination.

Donor states have agreed that coordination, transparency, accountability, and participation are paramount, and have pronounced so in the widely adopted Paris Declaration on Aid Effectiveness (2005) and Accra Agenda for Action (2008). But whether donor assistance is rights-respecting will depend on how and whether these principles are applied. This means implementing the necessary mechanisms to determine what impact aid is having on the ground. Such mechanisms might include a multi-donor fund, as used in Aceh and Afghanistan, that would integrate meaningful representation from Haitian civil society and grassroots networks, together with adequate technical and budgetary support from donors. Other options include a publicly accessible aid monitoring database or a forum to ensure grassroots community participation and input into how the money is being used. Former President Bill Clinton's remarkable admission that he had failed at one of his primary responsibilities as UN Special Envoy to Haiti—to ensure the disbursement of donor pledges from the 2009 Donors' Conference—should serve as a warning. If we cannot muster the political will to do things differently than we have in the past in Haiti, we will have failed as well.

Salvador G. Sarmiento is an advocacy officer at the Robert F. Kennedy Center for Justice & Human Rights and a contributor to CIP Americas Program (www.americasprogram.org)

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