Monthly Archives: October 2010

The Changing Microfinance Industry in India

When most people think of microfinance (which most people do not), they envision a poor person in a faraway country borrowing a few bucks to buy a goat.  In an article titled “Microlender Forecloses on Goat,” The Onion proves once again that it has its finger on the pulse:

Representatives from One World Finance, a U.S.-based microcredit provider, confirmed Monday that they had initiated foreclosure proceedings on a goat in southern India following a borrower’s repeated failure to make her $2.20 monthly loan payments. “I tried to work with Ms. [Subha] Thangam on this, but once she fell a full $6.10 behind, I had to repossess the goat,” said loan officer Michael Conrad, who stated that he was just doing his job and that it was “not [his] fault” if certain subsistence farmers were living beyond their means. “I’d love to recoup the entire $22 loan at auction, but given the glut of foreclosed and abandoned goats in the area, I’d be lucky to get even half that.” Conrad also acknowledged that the owner had left the goat in “pretty bad shape” and had even stripped it of its hair for potential resale on the paintbrush market.

The article uses microfinance as an allegory for the housing and foreclosure crisis in the United States.  But, in parts of the world right now, microfinance is starting to look more and more like the recklessly over-extended financial sector prior to the economic meltdown in 2008.  In India, in particular, analysts are concerned that the glut of investment in the microfinance sector over the last several years could be feeding a bubble similar to that of the subprime mortgage in the U.S.

When I was in the Philippines, I attended a few microfinance conferences and had the chance to speak with representatives from a few microfinance investment funds from India and elsewhere.  In the eyes of investors, the Philippines could be the next big thing.  The microfinance market in India is overheated, they’d say, with a slate of recent IPOs and a huge amount of private capital flowing into the industry.  Collectively, the portfolio size of all the microfinance institutions in India grew from $252 million to over $2.5 billion in less than two years.  There are tens of thousands of organizations offering microfinance services, but fewer than a hundred have the scale to tap into the capital markets.  A dearth of good investments and an increase in the number of funders has probably driven up the price for good MFIs and simultaneously forced investors to look down-market at institutions they might not have considered in the past.

Continue reading

Rainfall as a Predictor of Democracy

Somewhere, Jared Diamond and his Amish beard are plotting their revenge.

From the National Bureau of Economic Research, an organization reviled by Fox News, comes a fascinating paper.  Two economists suggest that the volume of rainfall in a certain location determines whether a democratic government will be successful.  It is actually a fairly simple argument.   Success in agriculture allows specialization, which, in economic terms, refers to the production, distribution, and consumption.  When farmers produce more food, fewer people need to participate in agriculture, leading the greater economic diversity.  This, in turn, lays the groundwork for the components of democracy.  The dynamic is described below in the abstract of the paper:

Why have some countries remained obstinately authoritarian despite repeated waves of democratization while others have exhibited uninterrupted democracy? This paper explores the emergence and persistence of authoritarianism and democracy. We argue that settled agriculture requires moderate levels of precipitation, and that settled agriculture eventually gave birth to the fundamental institutions that under-gird today’s stable democracies. Although all of the world’s societies were initially tribal, the bonds of tribalism weakened in places where the surpluses associated with settled agriculture gave rise to trade, social differentiation, and taxation. In turn, the economies of scale required to efficiently administer trade and taxes meant that feudalism was eventually replaced by the modern territorial state, which favored the initial emergence of representative institutions in Western Europe. Subsequently, when these initial territorial states set out to conquer regions populated by tribal peoples, the institutions that could emerge in those conquered areas again reflected nature’s constraints. An instrumental variables approach demonstrates that while low levels of rainfall cause persistent autocracy and high levels of rainfall strongly favor it as well, moderate rainfall supports stable democracy. This econometric strategy also shows that rainfall works through the institutions of the modern territorial state borne from settled agriculture, institutions that are proxied for by low levels of contemporary tribalism.

I guess we can get out of Afghanistan and Iraq now.  A counterpoint is Zimbabwe, formerly known as the “breadbasket of Africa,” which has been ruled with an iron fist by Robert Mugabe, one of the most ruthless dictators in the world.  The baggage of colonialism probably laid the groundwork for Mugabe’s reign of terror.  Still, a very interesting concept.

(H/T Tyler Cowen)

Economists found no correlation between democracy and chocolate rain.

Osama Bin Laden Tells Bono to Shove it

I hope Bono doesn't retract his endorsement of "Develop Economies"

Within the aid and development community, there are two camps whose views on the subject are diametrically opposed.  One side, led by economist Jeffrey Sachs and indie rock star Bono (one name), believes in a top-down approach, providing governments with aid money to implement programs that improve the welfare of the population.  The other side, under the spiritual guidance of economist Bill Easterly and championed by Dambisa Moyo, an economist with the conviction and warmth of Ayn Rand, and others, considers unconditional aid transfers to be counterproductive, further entrenching corrupt governments and exacerbating the very problems they are intended to solve.  Easterly and company support a more bottom-up approach, empowering the population to create sustainable economic growth and development.

The latter group derisively refers to the former’s approach to aid as “charity,” which, in this context, is not a good thing.  Charity, they argue, creates dependency and produces unsustainable solutions to long-term problems.  They believe in using capacity-building and commerce  as tools of economic growth, allowing nations to pull themselves up from their proverbial bootstraps.  After all, every first-world nation, with the exception of maybe Singapore, has ridden the tiger of manufacturing to prosperity.  Why should that path be any different for developing countries today?  China has lifted hundreds of millions of its own people out of poverty and is currently making strides toward the same end in Africa.  African nations are increasingly looking to the east for partnerships that offer a path to prosperity through participation in global economy.

Continue reading

Government is a Prerequisite for Hope in Haiti

The other day I had the chance to hear Michael Schlein speak about microfinance.  Schlein is the current CEO of Accion, one of the largest microfinance organizations in the world, serving over 150 million clients in during its history.  It currently operates 62 microfinance institutions in 31 countries covering 4.9 million outstanding loans.  He said a few things that I found out interesting.

Having only worked as CEO for one year, Schlein spent the better part of 2010 visiting Accion’s international operations around the world.  He spoke at length about his experience in Haiti.  After the devastating earthquake this year, the country has been plagued by problems.  Every Accion employee lost at least one close friend or family member in the disaster, including one who lost seven.  Port-au-Prince has effectively been destroyed, with piles of rubble where buildings once stood.  The impacts are staggering:

The 2010 Haiti earthquake was a catastrophic magnitude 7.0 Mw earthquake, with an epicentre near the town of Léogâne, approximately 25 km (16 miles) west of Port-au-PrinceHaiti’s capital. The earthquake occurred at 16:53 local time (21:53 UTC) on Tuesday, 12 January 2010.[5][6] By 24 January, at least 52 aftershocks measuring 4.5 or greater had been recorded.[7] An estimated three million people were affected by the quake;[8] the Haitian Government reported that an estimated 230,000 people had died, 300,000 had been injured and 1,000,000 made homeless.[9][10] They also estimated that 250,000 residences and 30,000 commercial buildings had collapsed or were severely damaged.[11]

In a country of 10 million people, a third of the population was affected.  10% of the population had their homes destroyed, and 5% were either killed or injured.   Continue reading

ShoreBank: A Banker to the Poor Goes Bust

ShoreBank is a Chicago-based financial institution that was founded on the principle that everyone deserves access to financial services and that, by offering these services to the urban poor, the community will benefit.  Sound familiar?  Its mission is very much aligned with that of microfinance.  And, since 1973, Shorebank was largely successful in achieving that mission.  Initially serving the South Side of Chicago, the bank eventually spread to Detroit, Cleveland, and much of the Pacific Northwest.   The organization’s ties to microfinance go beyond conceptual: the founders served as the first consultants to Muhammad Yunus when he was scaling up his Grameen Bank in Bangladesh.  David Oser, formerly the chief economist for Shorebank, explains the history of the world-renowned organization:

ShoreBank Corporation, the parent holding company then called the Illinois Neighborhood Development Corporation, was the first to seize on the idea that fostering community economic development needed more than just a bank. A bank, after all, is a reactive institution; it can only lend money to others who then initiate action, whether buying a home, improving a business, or rehabbing an apartment building. So, in the 1970s, the holding company created a non-profit to focus on job training and placement; a loan fund to assist minority entrepreneurs reach scale; and a real estate development company to catalyze neighborhood revitalization in South Shore.

He goes on to explain some of the company’s good works in the developing world: Continue reading