Thursday, March 13, 2008

Beyond (But Including) Microfinance

In this week's New Yorker, there's a feisty little article about microfinance and what it doesn't accomplish.

As chic as microfinance is, says James Surowiecki, its big picture economic impact is small. "Microloans make poor borrowers better off. But, on their own, they often don't do much to make poor countries richer."

Microfinance smooths incomes, and that's important. It eliminates a lot of desperation, and it frees up cash that poor families can spend on education and healthcare. By itself, however, it doesn't create economic development.

Microfinance implicitly assumes that everyone can and should be entrepreneurs. The history of economic development disagrees. Small and medium-sized enterprises (SMEs), not tiny sole proprietorships, are the kinds of businesses that separate developed from developing economies. While close to two thirds of American citizens work for SMEs, almost no one in the developing world does. Microfinance alone does not affect that imbalance. It doesn't fill the "missing middle."

What might fill it, reckons Mr. Surowiecki, is small scale equity investing. Microfinance alleviates poverty. Eliminating it is a job for paycheck-providing SMEs., the Soros Economic Development Fund, and the Omidyar Network seem to agree. And so do economists Karol Boudreaux and Tyler Cowen.

My hands on experience with microfinance, though admittedly limited, led me to a similar conclusion. Microfinance is a wonderful tool. A life of raising 12 pigs, 9 sheep, and 3 chickens is better than the life of raising 4 pigs, 6 sheep, and 2 chickens. But microfinance only gets really exciting when you stir it in with other development initiatives.

In October 2005, I transitioned from fully intense Chinese study into what quickly became fully intense microfinance work. My initial responsibilities at PlaNet Finance China were translation and grant proposal writing, but the resourceful nonprofit hustle quickly demanded more. And the crash course was amazing. Long before I came close to knowing what I was talking about, I was interpreting financial details from grassroots accounting people to visiting donors, drinking competitively with provincial party officials, and wading through the black dusty fog of coal mining country while filming a little documentary (you can watch the 13 minute film here and here; a friend put it up on YouTube, and, for some mysterious reason, split it into two pieces).

It was an opportunity for which I'm hugely grateful. It showed me that there really are two distinctly different Chinese economic cultures. One is famously ambitious and wants very badly to get rich quick. The other hides in the agricultural interior, slowly and painstakingly working to build long term sustainable microeconomies. Through my work with PlaNet Finance and their grassroots Chinese partner organizations, I had a chance to admire the beauty of that secret China.

And what I saw was so much more than just microfinance. It was participatory grassroots social work. It was educated but humble local people going into the poorest villages and engaging their neighbors in a dialogue about what their communities needed most. It was listening and negotiation. It was willingness to be flexible. It was road building, tree planting, well digging, fence running, and school renovation. And microfinance was the cherry on top.

The organizations with which PlaNet Finance worked were mostly very small and agriculturally oriented, so I didn't get an opportunity to see any SME investing or support in action, but much of what Mr. Surowieki says feels intuitively true. If the Ningxia Center for the Environment and Poverty Alleviation, the group with which I worked most closely and the champions of the participatory method as described above, had the resources, of course they would inject SMEs into their economies. It would be another tool, and they would use it.

My feeling is that all communities are going to need more than just microfinance. Maybe the ideal more is the nurturing of SMEs and the creation of jobs. I think it's probably more complicated than that, though.

I don't know, but it looks like I'm about to do a little more learning.

I spent two of my college summers working for a startup credit card company in Wilmington, DE, and an old colleague of mine has a situation on her hands. What was once their little startup is now the credit card arm of a huge global bank; she is in charge of a chunk of money that's supposed to use microfinance to fight poverty in Wilmington; what they've tried so far hasn't worked; and she's hoping I can come in and add a fresh perspective. It'll be a juggle to stay on top of everything, but there's no way I can say no to something like that.

I'll try to keep the blog updated on the progress. It's good to get a little microfinance in here finally.


What pushed me to write the thoughts above was a little convergence that happened over the past few days. In addition to the New Yorker article and the Wilmington microfinance proposal, I got an email from a blog reader the other day asking me if the brand comparison startup project was "a niche tool for the relatively well-off or something broader."

Fair question. How do you form a more perfect market without fighting poverty?

It's absolutely true. The project is catering to internet savvy shopping cart pushing Americans, and the website alone, even if it reaches some barely imaginable pinnacle, can only be a tiny piece of the solution. But maybe using charitable contributions from credit card companies to fight poverty in Wilmington, DE, USA is another tiny piece. And maybe as we all work on our tiny pieces, we'll find ways to stitch them together. I don't know if this is the best way of going about it, but it's what I got at the moment, so I'm going to go for it.


steve goodman said...

I'm curious to know how you define poverty, since it's at the core of your post. What does it mean to be poor? I don't want to frame it any more than that, so you're not overly influenced in your thinking.

Jake de Grazia said...

I think we can say that a family is poor if it can't comfortably cover the costs of basic needs like food, water, warmth, education, and healthcare.

There are probably other things that should go on that list, but I'll start with those.

steve goodman said...
This comment has been removed by the author.
steve goodman said...

I was curious because I believe that poverty, defined as being in some bottom percentile of income, is a fundamental component of profit based market economics.

I'm undecided whether poverty, as defined by access to shelter, food, education and healthcare, is something that can be eliminated by profit based market economics. It seems like it should be possible, but it also seems that the shelter, food, education and healthcare will be of low quality. Of course, that seems better than nothing at all.

Jake de Grazia said...

Hasn't poverty been a component of all economies of any size, be they profit based or not?

I guess the Cuba experiment is worth considering. An impressive percentage of Cubans, while certainly "poor" at a glance, do have access to food, water, warmth, education, and healthcare.

When I was thinking about my definition of poverty yesterday, I wondered if there might be a political element in there. Do you need freedom of movement or expression in order not to be poor? Hmmm. I decided to stick with a more economic definition.

Cuba. Hmmm.

Anyway, back to poverty as a fundamental component of market based economies...

Might a strong and accountable (uncorrupt, funds well allocated) philanthropic sector be a means of transition from a market economy with a poverty component to one in which basic needs resources are distributed well enough that no one is (economically) poor?

It's a dream, of course, but I think the philanthropic sector (nonprofit microfinance, integrated community development projects, education initiatives, healthcare initiatives, etc.) has an important role to play. The market economy allows the accumulation of huge wealth. A well organized philanthropic sector could redistribute it.

I'm not convinced that the philanthropic sector does better redistribution work than government at this point, but the Gates Foundation and are steps in the right direction.

Though maybe I'm just thinking like this because of my fear of government and corruption...