An Awkward Corner : development

The Problem With Microfinance

Niranjan Rajadhyaksha — Mon, 22 Dec 2008 11:39:00 GMT

I would not describe myself as a registered microfinance sceptic, but there is one question that has troubled me all along: why is it that Bangladesh is so desperately poor when it has some of the world's best and most successful microfinance lenders?

A very good letter written by Milford Bateman, a visiting professor of economics at a university in Croatia, in the Financial Times points to some basic problems in the worship of microfinance as a solution to mass poverty.

He says there is an iron law of microfinance. "...to the extent that local savings are intermediated through microfinance institutions, the more that country or region or locality will be left behind in a state of poverty and underdevelopment."

Bateman writes on his own research in Serbia and Bosnia, where a proliferation of microfinance ensured that dynamic small and medium enterprises were denied credit which went to informal sector microenterprises. Serbia is now "chock-full of traders, kiosks, shops, street-traders and subsistence farms."

"The East Asian countries managed to develop brilliantly through channelling much, if not most, of their savings into serious growth-oriented sustainable business projects. This is why many East Asian countries may have started at similar GDP levels as Bangladesh in the 1970s but have since massively outpaced Bangladesh in terms of growth and development. Economics 101 shows conclusively how critical savings are to development, but only if intermediated into growth and productivity enhancing projects. If it goes into rickshaws, kisoks, chicken farms, traders and so on, then the country simply will not develop and sustainably reduce poverty."

In short, how does microfinance square up with the neoclassical growth model?

Two doubts:

1. Was Bangladesh's per capita income similar to that of the East Asian tigers in the 1970s? I don't think it was.

2. What part of Bangladesh's total credit is provided by microfinanciers such as Grameen Bank? In other words, is it enough to crowd out lending to firms?

PS: I had earlier blogged about the ethical dilemmas in the business. Read this post, Microfinance: Merchants And Crusaders.

While the main point of that blog was to criticize Muhammad Yunus' attack on profit-seeking microfinancers, I had raised the same issue that Bateman seeks to answer.

" I have no particular sympathy for Yunus' recent outbursts. There is no golden rule that only a particular type of organization should lend to the poor. In fact, the rush into microfinance will push down interest rates, which cannot be a bad thing if you are a poor villager or slum dweller.

But this is as good a time as any to point to the sceptical case against microfinance. Many have asked why Bangladesh continues to be mired in terrible poverty when it has such a large microfinance sector. The good ol' basics matter more --- property rights, open markets, human capital, innovation etc.

A new policy research paper, Who Gets Credit?, published by the World Bank shows that economies benefit more when money is lent to firms rather than households. India is one of the 45 countries the economists have covered in their study."

Update: Gulzar blogs in response here. He is incisive, as always.

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How To Give Money To An NGO

Niranjan Rajadhyaksha — Thu, 11 Sep 2008 12:41:00 GMT

Okay, I have done by bi-annual duty and written out a cheque to an NGO.

This particular NGO tries to help poor children and offers a menu of programmes that a donor can partially fund. My wife and I usually ask the NGO to use our money to give girls an annual dose of iron and folic acid tablets. Why? We have no idea. My guess is that it was because the number of children who would benefit per thousand rupees we gave was very high. So we implicitly preferred our money to be spread amongst lots of children rather than it being focussed on a few.

Pretty unscientific stuff --- but we stuck to our gameplan.

However, earlier this year, I came across the findings of the Copenhagen Consensus. Fifty economists, including 5 Nobel laureates, analyzed "the world's greatest challenges and identified cost efficient solutions to meeting these challenges."

Basically, they told us what type of spending would give the most bang for the buck. While the economists who worked on this project were trying to help governments and large donors, their findings could also be useful for ordinary donors who keep aside a few thousands for an NGO or two.

I was happy to find that giving micronutrients to children were among the most effective ways to spend your money to help the poor. Two variants came in at number one and number three, amongst a list of 30 solutions.

You could check your own donor decisions as well.

Here is the complete list:

	Solution	Challenge
1	Micronutrient supplements for children (vitamin A and zinc)	Malnutrition
2	The Doha development agenda	Trade
3	Micronutrient fortification (iron and salt iodization)	Malnutrition
4	Expanded immunization coverage for children	Diseases
5	Biofortification	Malnutrition
6	Deworming and other nutrition programs at school	Malnutrition & Education
7	Lowering the price of schooling	Education
8	Increase andimprove girls’ schooling	Women
9	Community-based nutrition promotion	Malnutrition
10	Provide support for women’s reproductive role	Women
11	Heart attack acute management	Diseases
12	Malaria prevention and treatment	Diseases
13	Tuberculosis case finding and treatment	Diseases
14	R&D in low-carbon energy technologies	Global Warming
15	Bio-sand filters for household water treatment	Water
16	Rural water supply	Water
17	Conditional cash transfers	Education
18	Peace-keepingin post‐conflict situations	Conflicts
19	HIV combination prevention	Diseases
20	Total sanitation campaign	Water
21	Improving surgical capacity at district hospital level	Diseases
22	Microfinance	Women
23	Improved stove intervention	Air Pollution
24	Large, multipurpose dam in Africa	Water
25	Inspection and maintenance of diesel vehicles	Air Pollution
26	Low sulfur diesel for urban road vehicles	Air Pollution
27	Diesel vehicle particulate control technology	Air Pollution
28	Tobacco tax	Diseases
29	R&D and mitigation	Global Warming
30	Mitigation only	Global Warming

The expert panel of 8 economists, including 5 Nobel Laureates, ranked the list above in May 2008 in Copenhagen.

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Singur Is Not The First Such Battle For The Tatas

Niranjan Rajadhyaksha — Tue, 09 Sep 2008 07:48:00 GMT

The agitation by the farmers of Singur is not the first that the Tatas have faced.

As a young boy growing up in a middle-class neighbourhood in Mumbai, it was but natural for me to hear about Senapati Bapat and his battle against the construction of a dam by the Tatas at Mulshi, a village near Pune.

Bapat was a hero: he was close to extremist groups when he was a student at Edinburgh, and learnt how to make bombs there; he later became a fearless Gandhian. He was in his late-70s when he led satyagrahis into Portugese-held Goa, and was mercilessly beaten by the police there.

He led the agitation against the construction of a dam by the Tatas to protect those who were to be eventually displaced.

Ram Guha has written about this episode in an article published in The Hindu:

"Back in the 1920s, the peasants of Mulshi Peta, near Pune, had protested against the construc tion of a dam being built with government support by the industrial house of the Tatas. The struggle was led by Pandurang Mahadev (“Senapati”) Bapat, a socialist and nationalist who had been educated in England. Like Medha Patkar of the Narmada Andolan, Bapat was a leader of much charisma and courage. Like her, he identified completely with the peasants who fought to save their ancestral lands from being submerged."

I would ignore the brave attempt to compare Bapat and Medha Patkar. And the distance between him and Mamta is even more. But Guha tells us that an English book by Rajendra Vora on this episode is to be published soon.

"The World’s First Anti-Dam Movement begins with a meticulous reconstruction of the agrarian economy of the Mulshi region. Vora tells us of the forms of land tenure, the systems of credit, the crops grown and marketed, and the shrines cared for and worshipped in. He then moves on to the threat to the valley and its peoples by the dam being built by the Tatas. Next, through a skilful use of Marathi sources, he narrates the story of the long (if eventually unsuccessful) struggle aimed at preventing the submergence of the Mulshi valley. We hear of the hunger strikes by the leaders, of the marches and demonstrations by the rank-and-file. The complex connections between the Mulshi peasants and the middle-class nationalists of Pune city are carefully laid out. We learn of the profoundly ambivalent attitude towards the satyagraha of Mahatma Gandhi. Beyond the protest and the struggle, Vora also introduces us to the ideological dimensions of the conflict. He analyses the arguments of the proponents of the dam — who claimed it would generate employment and prosperity for the nation as a whole — and of its opponents, in whose view the project would merely impoverish one set of Indians to benefit another."

Notice that last sentence. That same debate is being played out in Singur right now. One side speaks of employment opportunities and industrial development. The other side says that one group of Indians is impoverishing the other.

What is it that Karl Marx said: history repeats itself, first as a tragedy and then as a farce.

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Actor Ben Affleck Understands Free Trade

Niranjan Rajadhyaksha — Wed, 03 Sep 2008 11:40:00 GMT

I loved the way actor Ben Affleck explains how trade and technology can help the world's poor: “these people know how to fish; they need a pond to fish in.”

The pond is obviously the US. Affleck was part of a discussion organized at Denver during the National Democratic Convention there.

"Nancy (Birdsall) added that nearly all of U.S. economic growth last year was associated with exports—a third of which go to developing countries. Increased opportunity and prosperity in those countries directly affects prosperity at home, she said.

Former Senator Tom Daschle, Congressman Don Payne and Ben Affleck all spoke of recent trips to Africa. Affleck summed it up best, saying that his travels “belied the image he had about Africa.” He urged better messaging to show the many things people are doing successfully in developing countries and that there are real solutions even in the direst places.

Gayle Smith asked the panelists what the rest of the world wanted to see from the next U.S. administration in response to global poverty. Don Payne said education; Oby said leadership on poverty; and Tom Daschle said leadership, justice and individual empowerment through health, education, and economic opportunity.

Nancy (Birdsall) took a somewhat different view and answered “trade and technology.” Developing countries don’t necessarily want aid, she said, they would prefer access to our markets. Wouldn’t it be wonderful, she said, if the next president gave fifteen of the poorest countries access to U.S. markets with no barriers to help create millions of jobs to help them life themselves out of poverty?"

At Mint, we have also been arguing that India must offer a free trade deal to African countries to earn some goodwill in that resource-rich continent.

Tooth Decay And Other Important Things

Niranjan Rajadhyaksha — Tue, 02 Sep 2008 10:26:00 GMT

An average 12-year old in India has 3.94 decayed, missing or filled teeth.

That's according to this wonderful chart from Gapminder World. (Hat Tip: Chris Blattman)

Here is data for some other countries.

China: 1.03

Pakistan: 1.38

Saudi Arabia: 5.9

Chris Blattman offers a tentative observation: "Dental problems seem to be lowest in the rich countries (good dentists) and poorest ones (no sugar?)."

Many kids would add to that: Low in countries with tough moms who force you to brush twice a day and high in the others.

By the way, I did notice that tooth decay is rampant in sugar exporting islands such as Mauritius (4.9). But I wonder why kids in former communist countries (Bosnia, Ukraine, Bulgaria etc) have such rotten teeth.

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Data Point: Singur

Niranjan Rajadhyaksha — Sun, 31 Aug 2008 04:13:00 GMT

Tata Motors will be investing Rs 1,500 crore in the 997 acres at Singur. That's approximately Rs 1.5 crore an acre.

That's not much.

The Times Of India says in a front-page report on Saturday that the total number of disputed acres across the country is 91,865. The total investment at stake is Rs 2,42,850 crore. The average investment per acre: Rs 2.5 crore.

Korean steel company Posco is investing some Rs 12 crore per acre in Orissa. Even other Tata projects on disputed land --- Kalinganagar, Jagdalpur and Gopalpur in Orissa --- will put in more investment per acre.

I wonder why the Nano project needs so much land for a relatively small investment per acre.

The story is here, though I could not locate the table online.

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Give Them Cake ... Sorry, Cash

Niranjan Rajadhyaksha — Tue, 19 Aug 2008 07:57:00 GMT

Mexico has run a social security programme whose success has attracted worldwide attention.

The system is called "conditional cash transfers" --- the government transfers cash to poor households who meet certain very simple obligations, such as innoculating children or send children to school. The process cuts out most of the welfare bureacracy that wastes and swallows money meant for the poor.

The interest continues. The Financial Times has commented on it recently. The Asian Development Bank has just put up a study that examines whether conditional cash transfers actually bring down poverty. You can download it from here.

And what about India? We should give it a shot as well.

Devesh Kapur, Partha Mukhopadhyay and Arvind Subramanian had this to say in a 15 January oped in Business Standard, where they wrote:

"The expenditures on different TPRPs under centrally sponsored schemes plus various subsidies conservatively amount to nearly Rs. 150,000 crores. If all these funds were allocated to the roughly 50 million poor households, each poor household would get about Rs. 30,000 annually, enough to hurdle over the poverty line at one go!"

By the way, TPRPs are targetted poverty reduction programmes, such as the public distribution system.

Mint too had written an editorial in favour of conditional cash transfer programmes. See here.

And we had run an oped by Gulzar Natarajan on this as well, a day before the Budget:

"With many flagship poverty eradication programmes in progress or on the anvil, it is only appropriate that the forthcoming Budget discard failed models and embrace strategies that will deliver the full bang for the buck!"

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Microfinance: merchants and crusaders

Niranjan Rajadhyaksha — Wed, 06 Aug 2008 10:48:00 GMT

The business of lending to the poor has become, well, a business. And the pioneer of microfinance does not like it one little bit.

Grameen Bank founder Muhammad Yunus has recently slammed those who are walking in his footsteps, but only to make a fat pile of money. Yunus has said that they are no better than loan sharks. This has been an issue of hot debate ever since Mexico's Banco Compartamos collected $474 million in an IPO a few years ago.

Microfinance does offer luscious returns. The World Bank says that microfinanciers charge an average interest rate of 28 per cent in 2006.

I have no particular sympathy for Yunus' recent outbursts. There is no golden rule that only a particular type of organization should lend to the poor. In fact, the rush into microfinance will push down interest rates, which cannot be a bad thing if you are a poor villager or slum dweller.

A new policy research paper, Who Gets Credit?, published by the World Bank shows that economies benefit more when money is lent to firms rather than households. India is one of the 45 countries the economists have covered in their study.

This flies in the face of received wisdom, but is perhaps a useful counter point to the general euphoria about microfinance.

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