Development Economics

Why Doesn’t the U.S. Invade Burma?

[caption id="" align="alignright" width="347" caption="Thingyan in Yangon: the best party in the world"][/caption] I write quite a bit in this journal about Burma (you might know it as Myanmar).  That is because when I traveled there a while back the country left a strong impression on me.  My last day in the country was the first day of Thingyan, the water festival that marks the Buddhist New Year.  362 days of the year the people are repressed, but during these three days they all seem to cut loose.  I knew a few ex-pats working in the country and spent the day with them, going from stage to stage (called “pandals”), which line the streets and pump in so much water from the lakes that, by the end, they are practically drained. Regrettably, I decided not to change my ticket and left after the first day. [caption id="" align="alignleft" width="347" caption="The festivities cut short by a bomb blast"][/caption] It turned out to be the right decision, because, two days later, the festival was rocked by a massive bombing not far from where I’d spent the my afternoon.  The government blamed it on rebel groups trying to disrupt the festival, but most people suspect the government itself was responsible, implicating the rebels in order to drum up support for the generals in the upcoming democratic election – the first in twenty years. The funny thing is that the elections have already been rigged in advance, so an action like this seems more sadistic than anything else. (more…)

Development Economics

Aid vs. Investment: Stop Sending Your Old Shoes

At a blog called "Friends of Ethiopia," a fellow by the name of R. Todd Johnson has a serious bone to pick with the aid crowd in Africa:

Outside of direct relief aid and some of the amazing health and education research and development, much (perhaps most) of what is done in the developing world through non-profits and NGO's, could actually be accomplished through a business model, even if it would be harder to raise investment funding. Instead, someone begins selling tax subsidized and donor subsidized water pumps in Africa, because it is easier to raise the funding through tax deductible donations rather than through the rigors of proving out the business model for investment dollars, with the great result of increased deployment of inexpensive water moving technology in the developing world to aid rural farmers, but the negative results of (1) killing the market for future indigenous entrepreneurs attempting to sell water pumps at a profit and (2) locking a potentially valuable distribution channel in a non-profit, making it difficult for other for-profits to use.
Yikes.  I agree and disagree.  I think that a lot of aid to Africa and other places is bloated, inefficient, and counterproductive. (more…)


The Microfinance Narrative in Action

This is the opening paragraph from a recent article about whether or not microfinance is effective:

Yohane Mdeme owns a food market in Tanzania. Though poor and with little to no collateral, he applied for a loan of $850 through to expand his small business. Twenty years ago in such a place and for such a client, Mdeme would never obtain the capital to increase his business. No bank would have given out such a small loan, much less to a person without collateral.

Yet Mdeme is well on his way to receiving his requested amount in full.

This process, called microfinance, has been put on a pedestal by development economists thanks to its high repayment rates and ability to provide capital and growth where it used to be nonexistent. But recent research links its success with national economic growth, suggesting it only succeeds in economies that are already beginning to bloom.

This is a good example of how, for better or for worse, the narrative surrounding microfinance is accepted as reality.  But the truth is probably a little less cut and dry.  In reality, Mr. Mdeme is a client of a microfinance institution and has probably never heard of Kiva.  He applied for a loan with the microfinance bank, which gets some of its money from Kiva, and, if he is asking for $850, it is probably not his first loan.  He will probably use much of that loan for growing his business, but some might be spent on his kids' education, clothes for his family, a wedding or a funeral (the two biggest expenses in a person's life), or something else.  It isn't entirely false.  It is just a simplified version of the truth that lacks a bit of nuance.

Some might argue that it's more important to tell it like it is.  David Roodman blew the doors off the Kiva community with a blog post highlighting Kiva's lack of transparency.    The article made such a ripple that it got picked up by the New York Times in an article called "Confusion Over Where Money Lent to Kiva Goes."


Development Economics

The Profit in Serving the Poor

The philosophical and ethical quandary over the direction of microfinance is an interesting one that gets a lot of play here at Develop Economies.  A drive for financial sustainability and the prospect of making profitable investments in microfinance institutions has brought investors to the industry.  This development opens up a whole new source of endless capital, but brings with it a new set of conditions that were never there before.  For example, a number of private equity firms have begun taking ownership of MFIs, buying equity in the business in exchange for with the expectation of a return.  Depending on the mission, these investment funds expect 15-20% return on equity, at the lowest.  These are the funds with an explicit social mission.  Others may expect even more. In contrast, the average return on equity for the 1,300 MFIs tracked by the Microfinance Exchange, an industry support organization, is 9.5%.  Granted, most of these are small-time operations, many of which are subsidized and are not financially sustainable.  The largest and most efficiently-run MFIs – ASA, SKS, and Share in India, BancoSol in Bolivia, Compartamos in Mexico, BRAC in Bangladesh, and others around the world – bring in much more than 15% ROE.  So most will not make the cut, unless they make concessions to their business and take a different approach to serving the poor.  Perhaps serve fewer of the poorest of the poor, perhaps move upmarket and take on non-poor clientele.  You can see signs of this in the numbers.  The size of the portfolio begins growing faster than the outreach (the number of borrowers) as the MFI starts serving comparatively wealthier clients that can handle higher loan amounts.  These loans are have a higher income and are less costly to service, increasing revenue and lowering operations costs.  The tradeoff?  The clients aren’t the poorest and are not necessarily the target clients of the microfinance institution. (more…)

Development Economics

Creating a Credit Bureau for People Without Credit

In any industry, when an increasing supply serves a stable demand, the market becomes overheated.  The same is true in microfinance.  As more microfinance institutions serve the same number of target clients, those clients begin taking loans from multiple sources, using one line of credit to pay off the others.  All of a sudden, instead of working with a single bank, now the clients have several different banks to choose from, all of which are vying for their business.  And these microfinance banks, while not competitive as those of the private sector, are still looking out for themselves and rarely talk to one another about their client roster.  So there is no way to check whether or not a potential client has another loan outstanding, other than to ask them directly.  And, according to one of the speakers at this conference in Davao, one study in South America showed that 50% of microfinance clients lie when asked about their number of outstanding loans.  When a client has several loans, balancing the repayments becomes trickier and more burdensome.   The end result is a higher rate of default as the market slowly becomes a bubble, which will inevitably burst. (more…)

Development Economics

China’s Governing Philosophy

A window into China's approach to politics and governance:

Confucian reformers generally favor more freedom of speech in China. What they question is democracy in the sense of Western-style competitive elections as the mechanism for choosing the country’s most powerful rulers. One clear problem with “one person, one vote” is that equality ends at the boundaries of the political community; those outside are neglected. The national focus of the democratically elected political leaders is assumed; they are meant to serve only the community of voters. Even democracies that work well tend to focus on the interests of citizens and neglect the interests of foreigners. But political leaders, especially leaders of big countries such as China, make decisions that affect the rest of the world (consider global warming), and so they need to consider the interests of the rest of the world. (more…)