Development Economics

Oil Drilling in the Niger Delta

In a little-known story from the southeastern United States, a large oil rig recently exploded in the Gulf of Mexico, releasing a nominal amount of mildly polluting oil into ocean, killing a few birds and galvanizing retirees in Florida - a political sleeping giant - into action.  This minor environmental calamity, which can hardly be considered more than a nuisance, is indeed tragic, but it pales in comparison to what happens elsewhere in the world.  Take this article from the Guardian, a British tabloid newspaper:

With 606 oilfields, the Niger delta supplies 40% of all the crude the United States imports and is the world capital of oil pollution. Life expectancy in its rural communities, half of which have no access to clean water, has fallen to little more than 40 years over the past two generations. Locals blame the oil that pollutes their land and can scarcely believe the contrast with the steps taken by BP and the US government to try to stop the Gulf oil leak and to protect the Louisiana shoreline from pollution. "If this Gulf accident had happened in Nigeria, neither the government nor the company would have paid much attention," said the writer Ben Ikari, a member of the Ogoni people. "This kind of spill happens all the time in the delta." (more…)

Development Economics

Why Children Become Soldiers

“He should be in school,” said Awil’s commander, Abdisalam Abdillahi. “But there is no school.”

This is a topic I admittedly do not know too much about, so any discussion about it will be academic and speculative.  But I have been reading recently about the problem of child soldiers in the U.S.-backed government military in Somalia, where kids as young as 12 have picked up arms to fight.  A few months ago I took a 10-day jaunt through Myanmar, which has the most child soldiers in the world (though you would never know it, since most of the country is off-limits to foreigners).  There are an estimated 300,000 children fighting in wars throughout the world, and a wide range of circumstances make this possible. For one thing, countries using child conscripts are usually embroiled in intractable civil wars that never seem to end.  Many of these wars began as ideological ethnic or religious conflicts and, over time, morphed into gangs of criminals fighting over control of land and resources.  (more…)

Development Economics

The Upside of Imperialism: Neo-Colonialism as a Strategy

[caption id="attachment_1248" align="alignright" width="300" caption="Homework by streetlight: the photo behind the theory"][/caption] A while back, I discussed why China had been so successful at poverty alleviation during the 1980’s and 1990’s.  I surmised that it had something to do with China's embrace of "state capitalism."  In a recent article in the Atlantic Monthly, one economist suggests that, actually, it is Britain is ultimately responsible for bringing more than 100 million Chinese out of poverty over a ten-year period.  By exporting the laissez-faire, business-friendly city model of Hong Kong to urban centers throughout China, the British created the seed that has grown into the China that exists as an economic and political powerhouse today.  (more…)

Development Economics

Carbon Credit Financing in the Developing World

[caption id="attachment_1230" align="aligncenter" width="482" caption="An Envirofit cookstove - designed in Colorado."][/caption] I am in the process of researching an article about the impossibly complex topic of using carbon credits to finance small-scale energy ventures in the developing world.  The experience reminds me of a religion course I took in college on the Old Testament.  I was confident that my five years of Hebrew school (I graduated when I was 12) would be sufficient to land me a high grade without much effort.  Unfortunately, I found out (too late) that there are, in fact, six five books of the Old Testament and I was familiar with a very small part of one those books (Genesis).  Likewise, trying to learn more about this topic has led me to everything from arcane parts of the Kyoto Protocol to how the global market for carbon has fluctuated in the downturn.  I wish I had chosen an easier topic, but the damage is done and now, hundreds of articles later, I know something about it. (more…)

Development Economics

Where's My Money, Fool: Conditional Cash Transfers

In this journal, I have discussed the different structural problems that a country faces in improving things like education, healthcare, and the economy overall.  A strong education system requires an adequate number of schools and teachers.  Likewise, good public health programs need to provide reasonable access to doctors and medical facilities.  Also, for healthcare in particular, people need to be educated about nutrition and preventive measures to avoid costly hospitalizations down the road.  But even with all of the components in place, not everyone will avail of these services.  Some people will choose to be the proverbial non-drinking horse, though usually out of necessity rather than willful ignorance.  That is because there is an opportunity cost to sending kids to school – if the child is working or watching his siblings while the parents work, going to school means lost income for the family. [caption id="attachment_1185" align="alignright" width="300" caption="Playin' with my my money is like playin' with my emotions."][/caption] So even if you have all the tools in place, it still might not be enough to effect the desired change.  One solution to this problem is conditional cash transfers (CCT).  In exchange for doing something, a person receives money.  In other words, you pay them to do the things you want, which happen to be the things that are ultimately in the best interest of them, their family, and country as a whole.  In this case, something means sending your child to school, immunizing your family, or any other behavior that will result in an improvement in “human capital.” (more…)

Development Economics

Why Government Microfinance Doesn't Work

[caption id="attachment_1162" align="alignright" width="199" caption=""I've got this thing and it's fucking golden!""][/caption] 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…)

Development Economics

The "Entrepreneur Myth" Myth

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. [caption id="attachment_1140" align="alignright" width="300" caption="Rational actors in the U.S."][/caption] 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…)

Development Economics

Filler: Links of the Week

[caption id="attachment_1076" align="alignright" width="239" caption="This is picture from an article on global warming and is irrelevant."][/caption] 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. (more…)

Development Economics

Competition, Saturation, Interest Rates, and Microfinance

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…)

Development Economics

The Movers vs. The Shakers: The Microfinance Debate

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…)