Defeating Global Poverty

I remember reading an article in The Economist sometime last year (I can't remember the exact issue) which was reviewing the impact/results of the various populist political movements in the past 50 years which have cyclically swept through Latin American countries. They all generally followed a similar model ... an elite group was governing politics and enriching themselves and their friends through corruption ... a charismatic leader arises promising to shift the power (and wealth) back to the average poor citizen to right this wrong ... this charismatic leader is swept into power based on their promises of nationalizing important industries and progressive redistribution of wealth back to the people. Eventually, the charismatic leader gets caught with their hand in the cookie jar and loses power back to a more centrist or right wing politician.

What The Economist was interested in was whether the working poor were actually better off after this process. They were actually expecting to find a mix of results. What they found was that in 100% of the cases that the working poor were actually worse off after these populist cycles. That is, while some of the working poor were helped out temporarily by the hand-outs, ultimately they (as a group) were not better off as the unsustainable welfare services were scaled back.

This is happening again in Venezuela. Chavez is funneling increasingly nationalized oil industry money into food and other subsidies for the working poor. He is instituting price caps on certain food items which is resulting in empty store shelves and a thriving black market. The currency is now trading at 50% of its official exchange rate on the black market. All of this is causing inflation ... which hurts the poor the most as they have the fewest options to hedge inflation. Wealthy and middle class people are converting their wealth to physical assets and even borrowing in bolivar currency to buy more assets/dollars through various schemes ... increasing their wealth.

There is also widely-recognized decline in oil production (although not admitted by the government) as Chavez pushes out the skilled oil company management replacing them with his cronies plus a decline in adequate oil infrastructure investment (due to his funneling of oil incomes to other schemes.) Chavez's policies are currently achievable because of the high price of oil. But, of course, this is not sustainable long-term and because oil revenues are not properly being invested in the country's infrastructure, there will be no pay-off at the end ... especially for the poor.

For more of the details:

• Venezuelans Chase Dollars, Wall Street Journal, 8-27-2007
• The rise of the Boligarchs, The Economist, 8-9-2007

Labels: populist, poverty, venezuela

In my quest for facts about poverty ... here is very edutaining video by Hans Rosling demonstrating how developing countries are pulling themselves out of poverty. He shows us the next generation of his Trendalyzer software -- which analyzes and displays data in amazingly accessible ways, allowing people to see patterns previously hidden behind mountains of stats. (Ten days later, he announced a deal with Google to acquire the software.) He also demos Dollar Street, a program that lets you peer in the windows of typical families worldwide living at different income levels. Be sure to watch straight through to the (literally) jaw-dropping finale.

Also, check out the GapMinder web service (now run by Google) ... incredibly interesting!

Labels: dollar street, gapminder, poverty, trendalyzer

Good video on the concept of patient capital from TED conference.

Jacqueline Novogratz is pioneering new ways of tackling poverty. In her view, traditional charity rarely delivers lasting results. Her solution, outlined here through a series of revealing personal stories, is "patient capital": support for "bottom of the pyramid" businesses which the commercial market alone couldn't provide. The result: sustainable jobs, goods, services -- and dignity -- for the world's poorest.

Labels: novogratz, poverty, ted conference

Very good question from KT on post of my recent interview ... just the kind of questions I like to ask! We need to have an open dialog on the outputs/results we are expecting/hoping for.

Dave, in the interview you mentioned: "microfinance has demonstrated, and it’s one of the few tools that I’ve been able to find historically that has had a large impact on actually lifting people out of extreme poverty on a sustainable basis and at a large volume". Do we have any hard evidence of that? In 2006, Economist magazine concluded that while "heart-warming case studies abound, rigorous empirical analyses are rare". Bangladesh is not one of the development success stories by any standards. Out of 7,000 MFIs around the world, fewer than 100 claim self-sufficiency.

I am not trying to criticise microfinance as such but it looks like the claims that it as a successful development tool are really exaggerated.

Here are a few thoughts:

• There have been a dirth of studies documenting the long-term impact of microfinance. I did write about one I read titled Measuring the Impact of Microfinance commissioned by Grameen Foundation. This has some data.
• I think there are a few reasons that there are few studies on microfinance impact:
1. Microfinance is a relatively new service. There have been a few organizations offering microfinance for 30+ years, but the huge growth in microfinance has occured in the past 5 years and so long-term results aren't available for most of MFIs.
2. Most of the successful (in terms of # of clients) MFIs have focused on growth, not impact research. For many of them the impact is just obvious to them on a daily basis as they see their clients' assets growing and lives improving. They'd rather invest their resources in opening new branches, raising more and cheaper capital and improving their internal efficiencies than running impact analyses.
   
3. Long-term impact studies are expensive with little return-on-investment value for the MFIs. Increasingly, the large MFIs have access to non-subsidized capital, so they aren't required by capital sources to invest in these kind of activities, so most don't.
   
• While I agree that ultimately for microfinance to help the poor long-term it needs to be sustainable (see my definition/criteria) ... and as you note most MFIs are not currently financially self-sustaining ... I'm not sure this has as much impact/relevance in the short-term. The reality is that there is subsidized capital available for many of the MFIs and so they are able to provide microfinance services for some time while running at a loss. Some might call this a "bubble" in financing.
  
• Ultimately, I think that for-profit microfinance is going to win-out and this will require sustainability. Today, most of the highest-growth MFIs are organized as for-profit. These larger, more efficient MFIs will absorb the smaller, less efficient ones and so it is likely that the financial services will have continuity.
  

Here is another post I wrote on a critique of microfinance impact.

I think that the most likely sources of impact analysis are:

• Independent specialized NGOs (or government anti-poverty agencies or university-related research initiatives) who care about this and are funded to do this kind of analysis and reporting.
• Emerging credit ratings services which are greatly needed to improve the efficiency of credit granting ... primarily to reward those who have proven themselves as credit worthy. There will be enough value that these can be run on a commercial basis.

Please post comments on what you think.

Labels: microfinance, poverty, poverty impact

Fast Company magazine writes an interesting article, Unplanned Obsolescence "exposing" the decreasing attractiveness of being a village "phone lady" in Bangladesh. FC is following up on a story they wrote almost 10 years ago when they first wrote about Grameen Phone, a wireless mobile service, and interviewed Laili Begum, the first woman to receive a loan to buy a mobile phone. Begum rented out her mobile phone on a per minute basis to others in her village at a mark-up over her per-minute cost. She became the first of now more than 280,000 phone ladies who are now almost ubiquitous in Bangladesh villages.

Initially, Begum was able to earn upwards of $800 profit per month which is more than 24 times what the current average Bangladeshi earns. Today she earns about $22/month profit from her mobile phone due to competition from almost 300 other close-by phone ladies plus the decreased cost for individuals to own their own mobile phone (about $30.) Overall, phone ladies now are typically earning about $60-100 of net profits per month after paying financing for phone and cost of air time.

So Begum and other phone ladies are having to operate additional business ventures to earn sufficient income. Here a summary of her status:

A decade later, instead of begging on the streets and sleeping with cattle as she once had done, Begum shares a two-room brick house with her husband, two sons, a daughter, a television set, and a refrigerator. Next door, she has built a barn, shops, and temporary housing that she rents to five poor families. Today, her banker estimates her net worth at $145,000, which may be more than everyone else in her village combined.

All I can say is "wow!" Begum was able to jump start her business with a lucrative new microfranchising business opportunity and then she took the profits and diversified into additional businesses. Very smart, indeed.

The article chooses to focus on lamenting about the lower margins available to phone ladies today as somehow pointing out the the Grameen Phone program is a failure in helping women earn their way out of poverty.

I take away a very different message and learning. Here are a few thoughts:

• As with every business, high margin businesses are always going to attract more capital and competitors, so (a) take advantage of them while you can, (b) build barriers to entry where you can; and (c) particularly if (b) is difficult, start diversifying into other businesses with which have more sustainable margin. Begum did this like a pro!
• So often, micro-borrowers are very uncreative with their business choices. The vast majority of them just do more of what they've always done or someone else is doing which can result in low or modest margins, but rarely high margins. This is why I think that there is such a huge new opportunity for microfranchise businesses ... essentially one-person pre-packaged businesses which provide an attractive product/service which is differentiated and can result in higher margins. Grameen Phone used to be this.
• Cash loans are so much better than specific business programs. Think if Begum had gone down the path of building her future purely around the Grameen Phone program. She would have been locked into a declining business model. Instead, she had a loan from Grameen Bank, a bank for the working poor, and she could choose over time which business ventures she wanted to invest in.
  

I'm going to write more about microfranchising in the future. Here are a few resources to get started with:

• My previous post on microfranchising
  
• Good blog on microfranchising innovations
• BYU Center for Economic Self-Reliance microfranchise
  

Labels: grameen, grameen phone, microfranchise, poverty

I was recently interviewed by Levi Hug, an economics student at Eastern Oregon University. Here’s a sampling of the Q&A...

Levi: What do you see that’s particularly special about microfinance, when compared to other forms of development?

Dave: I write a blog (defeatpoverty.com) and one of the things I’ve been particularly interested in and been doing a lot of research on is things that can help people get out of poverty on a sustainable basis, versus simply putting bandages on situations—helping someone through a short-term thing, but not necessarily helping them long-term. These things aren’t bad, there are lots of needs for people to be given relief in dire circumstances. But, ultimately what’s much better is to have people be sustainably out of poverty.

Number two, I’m really interested in things that have the potential for scale. One of my heroes is Muhammad Yunus, and one of things he talks about in his book is how some people haven’t liked his approach in pushing for very high volume in serving people. Some people say, “small is beautiful.” And, Yunus’ response is, “well, the reality is that small is small.” Helping five or ten or even 100 people is fine and good, but it’s still small impact. If you want to help a village, an area, a state, a community, a country, whatever scale you’re thinking of, that’s going to require something that can scale. So, microfinance has demonstrated, and it’s one of the few tools that I’ve been able to find historically that has had a large impact on actually lifting people out of extreme poverty on a sustainable basis and at a large volume. So, I’m really interested in things that meet that criteria and microfinance is one of the most interesting ones that I’ve observed. But, there are other things that are starting to be experimented with and are starting to show promise that may have the same characteristics.

Read full interview

Labels: interview, microfinance, my story, poverty