Industry & Commerce

While much is needed to strengthen the ongoing humanitarian aid programs within the developing world, it is also essential that rehabilitation and economic development are driven forward within those countries. Unlike humanitarian aid, commercial and economic development is not necessarily well-financed, often lacking political clarity it takes longer to implement and succeed in.

The essential message of the Humanitarian Development Program and the Humanitarian Development Summit will be to bring together those who can implement strategies to create the means of production in developing countries and allow for the 'economic multiplier effect'.

The multiplier effect

This is defined as the expansion of a country's money supply as a result of banks being able to lend. The size of the multiplier effect depends on the percentage of deposits that banks are required to hold on reserves. In other words, it is money used to create more money and calculated by dividing total bank deposits by the reserve requirement.

The multiplier effect depends on the set reserve requirement. To calculate the impact of the multiplier effect on the money supply it is necessary to start with the amount banks initially take in through deposits and divide by the reserve ratio. If, for example, the reserve requirement is 20 per cent, for every $100 a customer deposits into a bank, $20 must be kept in reserve.

However, the remaining $80 can be loaned out to other bank customers. This $80 is then deposited by these customers into another bank, which in turn must also keep 20 per cent, or $16, in reserve but can lend out the remaining $64. This cycle continues - as more people deposit money and more banks continue lending it - until finally the $100 initially deposited creates a total of $500 ($100/0.2) in deposits. This creation of deposits is the multiplier effect.

The higher the reserve requirement, the tighter the money supply, which results in a lower multiplier effect for every dollar deposited. The lower the reserve requirement, the larger the money supply, which means that more money is being created for every dollar deposited.

Reliance on commodity exports

Too many developing countries rely on commodity exports (often only one or two goods) but are still importers of higher value final products. The manufacturing of products means money that is used to pay for labour and materials moves through the economy creating the multiplier effect.

Developing countries primarily exporting raw materials and commodities lessen the circulation of money and ultimately create an imbalance in trade between rich and poor.

The issue of poverty will form a major focus of the Humanitarian Development Summit, concentrating on the required structural adjustments along with the technology transfer needed to allow developing countries to not just trade fairly but trade in the world’s higher value markets.

Oil potential

Many developing nations, especially African, have rich mineral deposits that only earn foreign currency as raw materials. International investment and technology transfer must bring the means of production and the opportunity to create added value.

With the exception of Sudan, Libya, Nigeria and Equatorial Guinea, Africa does not have huge oil deposits but still requires a stable energy sector to sustain growth and development. Huge opportunities do exist in renewable energy and local remote energy generation.