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Archive for May, 2010

"I've got this thing and it's fucking golden!"

One of the reasons a lot of people find microfinance attractive is that it is a fundamentally capitalist approach to economic development.  Done right, it can be sustainable and even profitable.  By focusing on a social mission, successful microfinance institutions (MFIs) can reach more clients by leveraging capital, similar to commercial bank.  And just like the Ice Queen warns in Atlas Shrugged, government intervention in capitalist programs spells disaster.  Whether or not this is true for other industries (it’s not), it is most definitely the case in microfinance.  Successful government-run microfinance institutions are the exception, not the rule.  And not only are governments generally bad at administering loans, they can be destructive to the market as a whole.  On the CGAP website question 13 of the FAQ is “Do governments do a good job of delivering microfinance?”  The answer is thorough:

There are several highly successful government MFIs, such as Bank Rakyat Indonesia’s microfinance department. However, the vast majority government microfinance programs do a poor job of delivering retail credit. Such programs are usually subject to political influence, high default, continuing drain on national treasuries, and sometimes lending based more on the borrowers’ influence than their actual qualifications. Among government programs reporting to international databases, only 1/8 of clients are being served sustainably.

To begin thinking about why government microfinance doesn’t work, it is important to think about the types of governments serving microfinance communities and the nature of government in general. (more…)

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Muhammad Yunus, the godfather of microfinance, contends that everyone is an entrepreneur.  And microfinance is about individual economic empowerment, built on the premise that credit is both a human right and a path to economic freedom.  This reading has been distorted by those who talk about the “entrepreneur myth,” which says that microfinance romanticizes the poor by pushing a false by-your-bootstraps narrative.  This narrative, in turn, undermines development by giving the poor something they don’t want – credit for a business – instead of something they need, which is steady employment.  This argument isn’t necessarily untrue, but it is irresponsibly oversimplified and demonstrates a lack of grounding in reality.   I want to discuss two articles that address this issue and use them to explain why this reading of microfinance is not only flawed, but is counterproductive in serving the poor.

Rational actors in the U.S.

The first one, titled “Romanticizing the Poor” from the Stanford Social Innovation Review, is a bit more difficult to refute, in part because I agree with the premise but not the logic, and also because I am intimidated by the fact that the author, Aneel Karnani, is an economics professor of South Asian descent and, I would have to assume, intellectually superior to me.  But I’ll try.  The article is less a refutation of microfinance as a poverty alleviation strategy as it is a caution against the merits of market-based solutions in general.  According to Mr. Karnani, the poor are not rational actors when it comes to economic decision-making.  Therefore, the argument goes, it is misguided and potentially harmful to try to apply free-market strategies – like microfinance – when the spending behavior of the poor is irrational.  He highlights the fact that the poor spend a disproportionate amount of money on booze and cigarettes at the expense of healthcare and education (Nicholas Kristof’s most recent article discusses the same issue).  The poor are more prone to impulse buying, so introducing more money and more material product choices will just drive them deeper into debt:

Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.

I don’t dispute the truth of these statements, mostly because I haven’t read the research.  I would say it’s not unreasonable to say that adults should be treated like adults when it comes to making decisions about how they spend their money.  Either way, they are irrelevant to an argument against microfinance.  (more…)

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This is picture from an article on global warming and is irrelevant.

Maintaining a self-described journal of economics and development is not easy work, particularly for someone such as myself who knows little about either subject and is engaged in a Madoff-esque Ponzi scheme of information, feeding you, the reader, the bare minimum required to appear legitimate, all the while stalling until I can glean a few more obvious and redundant points from the thinkers and load them into my plagiarism machine, which spits out stolen, yet relatively untraceable, drivel.  In my defense, I at least have the decency to take other people’s thoughts and ideas and craft them into readable, albeit trite, pieces of prose.  And that is more than the hacks that re-post content on “Twitter” can say.  For them, the format and process is usually consistent – the poster reads an article, then writes a brief summary/statement followed by a question –#CGAP says some #microfinance markets becoming saturated and competitive. What does this mean for interest rates?” – and consider themselves journalists of a type.  Actually, I should say I had the decency.   With this post – a collection of links – I am throwing that decency (incidentally, the only decency I had left) out the window.

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CGAP, the World Bank’s microfinance arm, turns 15 this year, having been formed ten years prior to Muhammad Yunus winning the Nobel Peace Prize.  In commemoration, Alexis LaTortue, the CEO of CGAP, wrote a summary of the state of the industry and the key transformations that have occurred over the last decade and a half.  There is a lot of to unpack for a 500-word article, but I want address one point in particular that I found interesting:

More institutions are sustainable.  Very few institutions were at the beginning, and there was even disagreement about whether they could be or should be.  Yet, today, once you take away clients served by state banks, about three-quarters of total clients are served by sustainable institutions.  In a few markets, we are even approaching saturation or real competition.

When I think about this statement, it leads to ask more questions about the implications of market saturation and sustainability for the microfinance community – the providers, the clients, the funders, everyone.    I had always assumed that saturated markets already existed, but the fact that, by CGAP’s own estimate, there are only 100-150 million microfinance clients globally and a potential market of billions.  It makes sense that, while some countries have relatively mature microfinance markets – Bolivia, Kenya, Bangladesh – most are far from being saturated in the way that, say, Boston is saturated with pizza shops.  But in the same way that Boston has damn good pizza, when microfinance markets mature and become saturated with sustainable institutions, they begin to offer damn good financial services to the poor. (more…)

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In the noisy echo chamber of the development community, there are a lot of arguments for (emphatically) and for (tentatively) microfinance as a tool of poverty.  The debate surrounds a series of experimental studies questioning the impact of microfinance in achieving its stated goals – specifically, empowerment of women and poverty alleviation.  The participants are the critics and the practitioners.  The practitioners tend to dismiss the critics as having blind faith in statistics and either ignoring or being ignorant to the realities on the ground, while the critics contend that the practitioners drank the Kool-Aid long ago and refuse to admit that, while microfinance is impactful, it is perhaps not to the extent they believed.  Those are both exaggerated overstatements and many people bridge the divide, but it is close enough.  The debate reached a fever pitch recently, with some of the biggest practitioners – Accion, Grameen Foundation, Finca, Opportunity International, Unitus, and Women’s World Banking – jointly issuing a statement defending the impact of their trade.  It is a short statement and worth a read, offering a distilled version of the practitioner argument.  The authors describe what they consider to be the major flaw in the critics’ argument:

Unfortunately, it is extremely difficult for studies to quantitatively demonstrate the impact of microfinance. Such studies face two fundamental challenges: their ability to capture and analyze all the benefits of microfinance, and the duration of the study itself.  To obtain quantifiable data, researchers have to ask narrow questions over relatively short periods of time–-14 to 18 months in one case–-which does not always allow the time necessary for impact to manifest itself. And because of the growing penetration of microfinance, researchers are finding it increasingly difficult to find homogenous geographical regions that contain both clients who have access to financial services and those who have none.

This is all true.  Statistics give an incomplete picture and do not pick up the nuanced effectiveness of microfinance, which is manifested in individual success stories rather than a large group of people moving out of poverty.  Negros Women for Tomorrow Foundation is a good example of this principle at work.  It periodically measures the poverty level of its clientele using the Progress out of Poverty Index (PPI).  Over the last five years, 22% have moved upward, 19% have moved downward, and the remaining 59% have remained pretty much the same.  On balance, there is a net upward poverty movement, but not by much.  Also, the number of clients that moved downward might have been much higher had they not been receiving microfinance services. (more…)

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This is a campaign poster found plastered on a wall on the side of the road somewhere in Bacolod.  It shows Benigno “Noynoy” Aquino, the current frontrunner for president in the Philippines election, with Andal Ampatuan Jr., perpetrator of the worst election massacre in the history of the Philippines.  Above their pictures is the phrase “Patay Tayo Dyan!” – “We’re dead meat!”  Of course, they are not actually running together, but it is a good campaign trick for his opponents.  This is a recent addition to the campaign posters that line every inch of visible space in Bacolod and the rest of the Philippines.

The national election is a great time to be in the Philippines.  It happens once every six years, and the country fires up.  Tonight is the night before the official election, which means the candidates have their people in the streets handing out money – 500 pesos at a time, or $10 – in exchange for votes.  When the candidate cannot buy the voters, he rents a bus, fills it with beer and pork, and sends the people to the beach for a day of drinking, partying, and non-voting.   In America, we pay lobbying firms to bribe the politicians for us and use Karl Rove to divide up the electorate.  In the Philippines, they cut through the fat and shoot from the hip, if you’re pickin’ up what I’m puttin’ down.

Imelda Marcos, wife of the Ferdinand Marcos and owner of a lot of stolen Filipino money. Now Congresswoman Marcos.

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On Monday, the Philippines will hold a national election.  It is the first time the country will be using an automatic voting system, and nobody knows what is going to happen.  It seems appropriate to include this post before the election is over.  For more on the candidates, check out this BBC News primer.

Over the last four decades, the economic landscape in Southeast and East Asia has shifted.  After World War II, the Philippines had the second largest economy in Asia (behind Japan).  Years of mismanagement, corruption, and poor government policies dragged the economy down during the 70’s and 80’s.  The policies of Ferdinand Marcos, a strongman who imposed martial law on the country until 1981, depressed economic growth during his years in power.  Isolated incidents, including a severe recession in 1984 and the Asian financial crisis in 1997, put further downward pressure on the economy, hampering progress after reforms in the 1990’s.  Even now, the period of optimistic economic growth which President Gloria Arroyo has attributed to herself is, in reality, a result of remittances from abroad, which account for 11% of GDP.  All of this has led to a national poverty incidence of 40%.

Compare this with China.  In the 1981 the poverty incidence in East Asia was 85%.  Over the last 30 years, China has enacted economic reforms designed to drive the poverty level of the country down.  As of 2005, the poverty incidence in East Asia had fallen to 16%.  This decline of 600 million people is attributable almost exclusively to China.   The chart to the right shows something amazing: when you remove China from the picture, the percentage of people living on $1 and $2 per day has remained essentially flat over the last 20 years.  Since 1990, China has accounted for almost all of all of the poverty alleviation in the world.  Why has China done such a good job of pulling its people out of poverty, while the number of poor seems to stay relatively consistent in the Philippines?  The system of governance espoused by the two countries over the last 30 years is at least part of the answer. (more…)

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