Wokai is starting to get some nice news coverage and the video below is a good introduction to what they are trying to achieve and how the  local microfinance partners actually work.

As the reporter notes China is not really regarded as a poor nation anymore. How could it be with over $2trln in reserves. But outside of the big cities it is a different stories. Access to finance in rural areas is difficult and state finance has been directed towards major projects and city development.

By creating a platform and helping local partners Wokai is actually laying the foundations for community based finance systems in China. This is a great mix of local and gloabl partnership and shows the power of the internet as a platform for building global networks without government interference.

The financial restrictions in China mean that loans through Wokai eventually become donations as the money cannot be repatriated out of the country (for now). However, it is tax deductible being a donation so you get a good bang for your buck.

Another bonus is the opening up of China to the outside world. Given that censorship is still heavy (many networking sites are often blocked) its great to be able to connect with the local population in an open business exchange. This can only help bring China closer to the international community and foster a greater connection between different people.

Listening attentively to a paper on Aid and the Millenium Development Goals at the NZAE ‘09, it occured to me that perhaps the traditional aid model should be completely ditched. I let that thought swirl for a few moments whilst i considered the ramifications and then came back to the idea with a simple vision.

Let peer to peer aid be the new model driven by people not governments.

Why are governments involved anyway? Well that’s not about aid really, its about influence…ok let’s be brutal it’s about money and power. Yes it’s all about politics: quid pro quo, backhanders and the rest of it. We’ll give you money and you help us out, vote for us at the UN or give us some nice contracts for whatever.

That’s the good bit. Now let’s see it in action. Up the government chain on one side and down the other. Hands out all the way up, across and down. Let’s not even go there. Of course some governments take this seriously and see aid as a genuine redistribution of national income but the model has been sorely abused over the years.

Even locally we had the Niue government telling the NZ PM that if it didn’t receive aid quickly it would turn to China instead. It doesn’t get more blatant than that. More and more aid has become a strategic tool in the foreign office of wealthy nations.

Francis Fukuyama recently reviewed two books on the subject both with similar themes but differing opinions: “The Challenge for Africa” by Wangari Maathai and “Dead Aid” by Dambisa Moyo. What I like most is that these are books coming from Africans themselves and women as well. It’s a refreshing change to Western University academics. It’s also an area of quite passionate debate. Here’s a great debate with Dambisa Moyo, Hernando de Soto, Paul Collier and Stephen Lewis on whether foreign aid does more harm than good.

Some issues are clear: corrupt governments and a weakened civil society; years on the western government welfare teat; trade barriers and resource depletion. The West carries the guilt and assuages it with cash even if its straight into the Swiss bank account of the latest tyrant.

So if governments are the problem why not remove them from the picture?

Well perhaps that is what will happen. Today the UK Conservatives unveiled a new policy on aid. As part of that they proposed a Gbp40m fund called “My Aid” which would allow the people to vote on their favourite aid project. Ok this all sounds a bit like the next reality show but for me it signals a subtle change in direction.

What if governments simply dropped their Aid budgets and gave that money back in either tax cuts or tax credits for giving? What would happen?

- Microfinance would take off.

- Giving platforms would widen and internationalise.

- There would be more targeted and personal involvement.

- Social Media would drive this (TwitterAid?).

- This would lead to grassroots build up and development of localised civil society.

- It may lead to an increase in giving as government moves out of the way.

- And maybe less celebrity nonsense as well!

Above all this p2p Aid model would be people driven and . as with microfinance, be very empowering. The aid infrastructure will still be necessary but that too may require some modification or restructuring. The Kiva and Wokai models will be very useful for this as will giving and donating platforms.

I’m just back from 3 lovely days in Wellington (nice weather for a change!) at the NZ Association of Economists Conference. It had a good vibe and felt like there was a wider range of interesting papers than the last one I attended. The topics of interest for me are listed below (I will post in more detail once the papers have been uploaded to the NZAE website):

- Tax Reform: The perennial favourite, Capital Gains Tax, made some waves as did some more detailed examination of a possible Land Tax. This initially popped up 18 months ago as a floated idea and more recently was discussed at length over at Interest.co.nz.  The session on Tax Reform was sponsored by the Treasury so expect more debate on this in the near future.

- Aid and Development: There were a few papers on corruption and developmental outcomes which were worth following (though I haven’t seen anything to rival Paul Collier’s work). I especially enjoyed a paper on whether aid was helping to achieve the Millenium Development Goals. To me it was clear that whilst aid can make some contribution, targeted p2p actions such as microfinance and giving are more likely to have a lasting impact as they tunnel through the swathe of government and administration on both ends of the aid pipleline. Message to Government: Let people do the giving.

- Business and Innovation: It’s good to see economists looking at this topic since it’s of major importance to NZ. Again lack of capital and R+D incentives for business was a clear problem. We simply can’t compete with countries like Finland or Israel when all our capital is tied up in housing.

- Health: One good paper on “fat” taxes or food “subsidies”. It simply reinforced my position of taking a supply side approach. It’s hard to influence demand through pricing strategies when the underlying commodity (food) is experiencing huge swings in price. As with oil and carbon taxes, the prices movements in food prices will overwhelm any attempt to reduce demand by taking away GST for example (12.5%). Perhaps incentives like gift vouchers/cash in savings accounts will help focus (a bit like the idea to pay girls an annual stipend for each year they don’t get pregnant). We have to get our future health costs down somehow and creative solutions may be required. Time to call in the behavioral psychologists methinks.

- The Financial Crisis: Nice paper looking back at financial collapses over the last 200 years. Yes they happen with regularity…..whoa…yes we know that. The cycle goes back as far as records allow. Even the Bank of England was not immune from overstretching itself… a run on the Central Bank itself. Ooops. So my simple question is: When are we going to change the system?

Overall it was a good conference and a lot came out of it. For next year I can see more focus on the impact of microfinance and p2p activities, more focus on tax reform, more focus on the debt based financial system and hopefully we will have some more ideas to contribute ourselves.

Also good to see someone with a laptop on the go! Surely a first for the NZAE.

The Olympic Torch continues to trip and stumble its way to Beijing. That there would be protests along the way was never in doubt but what has been a surprise is the mobilization of Chinese citizens along the way. In Australia there were clashes between Chinese supporters and pro-Tibet protesters. The same thing happened in Japan yesterday.

This is a new phenomenon and one that should be taken note of carefully. There are a lot Chinese living overseas, many of whom were glad to get way in the bad old days of communism and repression. Now things have changed. China is open for business and the most dynamic economy in the world. Suddenly its cool to be Chinese (well sort of) but just as India was “in” a few years ago, China is now all the rage. With this has come a new sense of purpose and national identity both in China and overseas. It certainly gives rise to a lot of comment and opinion.

Where this ends up is anyone’s guess but a resurgent China will be a shock for many people used to browbeating and looking down on China as simply a repressive regime with super cheap labour.

The Chinese vice commerce minister said on Friday “Chinese enterprise should transform themselves from purely from being exporters and importers to being multinational companies through overseas acquisition and production”. That’s a big statement. We’ve already seen this approach with  stakes being taken in US banks and industries but these guys are not messing around. With $1.6trln in reserves they can pretty much buy anything.

They are smart. Why buy US treasuries when you can buy US companies? They can spread influence using economic rather than military means and of course secure a constant supply of the resources required.

It’s a fascinating developmental process to watch and the ramifications are bewildering to imagine.

We certainly do live in interesting times.