17 July 2008

You can’t sing that, it’s my song!

I suppose the story is the same between young siblings and/or cousins in families across the world: a mother teaches her son or daughter a song, and the child takes ownership of the song to such an extent that you eventually hear something to the effect of: “You can’t sing that song, it’s my song!” when an older sibling (or cousin, or even uncle) provokes the little one by daring to sing his or her song.

It’s all very cute for small children, but we wouldn’t expect to see this kind of childish behavior among adults, and especially in the NGO world where everything is supposedly for the greater benefit of mankind. So it was with great interest that I read these recent articles about the explosion in commercial microfinance (positive and negative ) in BusinessWeek.

Microlending (a.k.a. micro-loans) have been the bailiwick of non-governmental development organizations (NGOs); I would goes so far as to say they have been the single, most effective use of these organizations’ funds. Their funding, which can come from a number of public and private sources, is given with the explicit or implicit stipulation that they will be used to help needy people of the underdeveloped world. Prior to Muhammad Yunus’s revolutionary idea of making tiny—by our standards—loans to poverty-stricken entrepreneurs in the developing world, development funds were generally either given to the governments of these developing countries, or used by the in-country aid agencies.

Of course, direct payments to a 3rd world government or its associates does about as much good to the suffering people of in their country as wiring the money directly into their leaders’ personal bank accounts, because that is where most of it ends up anyway. Assuming this is an unfairly harsh characterization, at the very least and by virtue of the underdeveloped state of their economy, the policies put in place by these governments (of course it is always the previous regime’s fault) demonstrate that, collectively, the government is horribly incompetent—therefore, a direct payment is throwing good money after bad.

On the other extreme, you can send in your own people to administer the disbursement of these funds, but regardless of how idealistic they are, if they are intelligent, competent and successful, they will need to be properly compensated and will require a nice home with western amenities, an office with air conditioning, and a Land Rover to negotiate the poor roads. Besides eating away a good portion of the funding—ultimately intended for the suffering population you are trying to help—this also causes a certain amount of resentment from local staff and the population in general.

Regardless of which method you choose, you will only be able to help a small number of individuals or businesses in any particular country. This is the simple reality of the situation: the need is great, but your budget is limited—even if you have the backing of someone like USAID (the US government) or UNDP (the UN.) This, in turn, creates “islands” of development aid. While these “islands” usually have a geographic characteristic (concentrated around the capital and other major cities) it more accurately describes the network of people that are “in” the development community; in other words, those that get the help do so because they know people, know how to fill out a grant application, etc. Those that are outside of this “island” have little chance of getting any help (either monetary or technical), and again this is regardless of the idealistic and egalitarian intent the program may have been set up with—this is just how it work; some get seconds before equally deserving entities get anything.

Returning to the topic of microfinance, this is generally a wonderfully effective use of development funds. The purpose of each loan is to create or expand the business of a desperately under-served entrepreneur/small businessman—giving them something, even if only a subsistence job, where before was absolutely nothing. In effect, each loan is a direct, targeted (albeit very small) aid package to an individual, family, or small business that would otherwise have no access to capital due to a total lack of credit history, collateral, or any other traditional way to demonstrate creditworthiness. Incredibly, micro-loans—as they’ve been administered—have a surprisingly high repayment rate. This means that as loans are paid back (and with interest) this money can be lent out again and again—eventually benefiting many more people than any other development program could do with the same amount of money. Microlending has deservedly become popular throughout the development community; even the smallest NGOs and religious organizations are getting into the game. Since you are already on the Internet, you can even surf on over to kiva.org and make you own micro-loan!

Naturally, financial institutions have woken up to this lucrative market, and entered the mix. Now some in the NGO world, especially Mr. Yunus, are crying “foul!” However, in practice, the high ideals of people who say that we should not make money from the poor in this way are simply limiting the opportunities of a vast population who are simply not “connected” enough to be one of the few, lucky ones who gets a loan from an NGO. Regardless of their intent—in my mind at least—they come out looking like the child who says, “you can’t sing my song” or, worse the hood who says, “hey, that’s my turf!” The whole purpose of micro-finance is to provide capital to previously underserved populations; now that traditional players are doing so, Mr. Yunus and the rest of the NGO community should pat itself on the back for making a real, effective change in the world instead of worrying about their own turf.

Granted, part of their complaint is that these for-profit entities charge too much interest, but as more commercial players enter the market, the interest rate will naturally settle to a level commensurate with the risk of such loans. We know from basic economics that the riskier an investment, the higher interest (or other form return) that will be expected. This risk/reward curve gets a little discontinuous at the extreme where defaults are very common, but let’s remember that even the slimiest payday lender is providing credit to someone who has no other alternatives.

Likewise, I am concerned about the Mexican big-box retailers mentioned in this article that are marketing the western “have it now, pay later” lifestyle that may cause more harm than good to these desperately poor people; but who am I to say that only I and my fellow middle-income earners of the world should be allowed to have these modern conveniences? In this regard, concerns about payday/title loan sharks in the US and questionable lenders in the developing world both result in a very paternalistic view of the “great unwashed masses” of the world—which I am willing to concede is sometimes warranted, but doesn’t have a place in discussions of a free market.

Déjà vu

This issue reminds me of a very similar complaint last year from Nicholas Negroponte of the One Laptop Per Child project. (WSJ article) He was whining that Intel, Microsoft, HP, et al were chipping away at his non-profit’s business after he and his brilliant team from MIT developed the versatile and inexpensive (although never quite reaching the promised $100 price point) XO computer for underprivileged children across the world. Again, he should have simply declared victory—these huge incumbent companies are now making low-cost computers to fill a previously underserved market: the developing world. Instead he questioned their motivations—namely that they were just temporarily lowering their prices to get the developing world hooked on the WinTel platform (instead of his open-source platform.)

Disclaimer: This is in no way an indictment of any organization that I have been associated with, rather it is a general observation of international development efforts that I've seen during my stint in this field and from my continued interest in this area since then.

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