Aid Realism for the Idealist

by on June 30, 2009 at 7:37 am in Books, Economics | Permalink

The failure of foreign aid to lead to economic development has left many cynics in its wake. For this reason, I enjoyed The Blue Sweater, Jacqueline Novogratz's story of moving from aid-idealism to aid-realism without ever passing through the way-station of aid-cynicism.  As a naive, aid-idealist Novogratz spent a lot of time on the circuit in Africa; eventually hard lessons wore away the naivety but not the idealism.  Of course, Novogratz learned a lot about the corruption, failure to experiment, and lack of accountability of the aid agencies but she also learned to be realistic about the do-gooders:

Philanthropy can appeal to people who want to be loved more than they want to make a difference.

But the hardest lessons were about the poor.  In the late 1980s, Novogratz worked with a group of native women to build up a thriving business in Rwanda.  Inevitably some of her friends became terrible victims of the 1994 genocide.  Perhaps even worse, some of her friends became perpetrators.  Hard lessons like these drove Novogratz's evolution.

I've read the following sort of thing many times:

It is so often the people who know the greatest suffering–the poor and most vulnerable–who are the most resilient, the ones able to derive happiness and shared joy from the simplest pleasures.

I've heard it so many times, I tend to dismiss it but Novogratz follows up with this:

That same resilience, however, can manifest itself in passivity, fatalism, a resignation to the difficulties of life that allows injustice and inequity to strengthen and grow…

Which, for me at least, turned a trite observation into an important insight.

Novogratz's experiences eventually developed into the Acumen Fund, a venture capital firm for aid.  The idea is to invest patient capital in scalable, for-profit businesses that deliver services to the poor.  The fund, for example, has invested in a firm producing drip irrigation systems in Pakistan, a Tanzanian firm that produces mosquito nets and an Indian firm producing internet-telephone kiosks in small villages.

The fact that the businesses have been for-profit has been critical.  In selling bed nets for example the Tanzanian firm learned that talking about malaria doesn't sell. What sells, in the words of one of their top salespersons is, "The color is beautiful, and you can hang the nets in your windows so that your neighbors know how much you care about your family."  As Novogratz puts it:

Beauty, vanity, status and comfort….The rich hold no monopoly on any of it.  But we're a long way from integrating the way people actually make decisions into public policy instead of how we think they should make them.

Patient capital is no panacea–what is?–but by investing in entrepreneurs who must listen to their customers a charitable venture-capital firm can multiply the effectiveness of its philanthropy.  

There is a powerful role both for the market and for philanthropy…Philanthropy alone lacks the feedback mechanism of markets, which are the best listening devices we have; and yet markets alone too easily leave the most vulnerable behind.

1 Alex June 30, 2009 at 8:31 am

I would love to get a lunch together between Novogratz, Muhammad Yunus, William Easterly and Jeffrey Sachs. That would be lively.

2 farmer June 30, 2009 at 10:18 am

kiva > acumen

3 Tsai Yi Chan-Beal June 30, 2009 at 11:14 am

Culturally we’ve been raised to identify certain things as inherently not-so-good (evil might be a bit strong, but close). We’ve been told those things are almost naturally against the innate goodness of humankind. Money has that kind of bad rap, as does marketing and profit in general. When we can let go of some of those beliefs and see things as they are (e.g. marketing is an effective tool that can do good or bad depending on the person using it), we’ll finally be able to craft and implement effective strategies that will bring enduring change.

4 Mr. Econotarian June 30, 2009 at 12:58 pm

I recently asked the founder of KIVA, Jessica Jackley this question: “Isn’t microfinance just a symptom of financial sector over-regulation in developing countries?”

Her answer was “No, microfinance is just a way we can help.”

Which, of course, did not shed much light. She didn’t say “No, financial sectors in developing countries are not over-regulated, but microfinance is some kind of magical fairy dust that beats out the established banking industry in developing countries”.

Nor did she say “Yes, developing country financial sectors are over-regulated, which is why NGO-based microfinance is needed, it is a way we can help until the political process becomes rational and de-regulation occurs in the financial sector of developing countries”.

Anyway, I would be much happier if those in aid, microfinance, and other charitable NGOs were willing to admit that they exist largely because of poor political and regulatory environments with low economic freedom, and that they wished those situations would be fixed so they could get put out of the charity business.

5 Zbicyclist June 30, 2009 at 4:36 pm

@Mr. Econotarian:

“the founder of KIVA, Jessica Jackley this question: ‘Isn’t microfinance just a symptom of financial sector over-regulation in developing countries?’ Her answer was ‘No, microfinance is just a way we can help.’

Actually, I find it refreshing that she didn’t over-answer the question.

6 Travis June 30, 2009 at 8:58 pm

I had actually thought about something similar in refrence to the upcoming anti-trust case with google. I imagine that it may be easier to turn wikepedia to a for profit to make something capable of competing against google as a place to place internet advertising. I in no way envy either the goverment or google in this venture. (or for that matter the consumers).

If a a few other great non-profits industries were somehow able to maintain similar missions and goals while adding the goal of profit they just may make the world slightly better.

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8 Phillip Huggan July 1, 2009 at 12:07 am

…I’ve noted from world news observations last few years about 1/3 of poverty is bad aid as described, the rest is insufficient aid levels (give them the damn mosquito nets if insufficent income). Perhaps where you guys are making a very very acute observation is many skills are not properly costed. A western salaried/skilled aid worker needing to teach someone about the benefits of using a mosquito net probably is teaching some schooling rationality basics equivalent at least to $hundreds$, orders of magnitude more than $8 cost and $25 mailing cost of net. Same for administrative costs of delivery small microfinance loans. Where someone could make a fascinating contribution is in learning where these costs reduce via economies of scale. Microfinance is now being offered by mainstream banks in developing world.
I’d guess if enough people use mosquito netting, it becomes part of local custom and gets explained in kinship circles for free. Those wells definitely don’t scale (though maybe economic if locals somehow capture well services supply chain, which is a different economic subject).

9 Ricardo July 1, 2009 at 1:52 am

Regarding microfinance… any institution that isn’t a chartity (actually operates on an economically sustainable basis without relying on donations), will charge interest rates that many people would find disturbing. 5% monthly is typcial (60-80% per annum).

The MFIs I’m familiar with charge in the range of 2-5% with 5% being the high end of the range. Maybe in other countries or regions 5% is more typical. It’s not that outrageous when you compare it to what credit cards in the U.S. charge. I think if you compare it with local credit cards in these countries, the discrepancy is even smaller. And as you point out, MFIs lend without the benefit of credit scores or, in many cases, even credit bureaus to get past credit history.

However, learning the facts about interests rates may send microfinance proponents into fits of cognitive dissonance when they can no longer figure out whether the borrowers are being empowered or exploited.

I don’t know anyone who has real-world experience in the sector who would go into these aforementioned fits of cognitive dissonance. Microfinance beats local loan sharks, often by a substantial margin. It would have to, otherwise people would never tolerate all the paperwork needed to apply for a microfinance loan. For MFIs not operating on the Grameen Bank model, you typically have to have an existing business and have to show your business is stable enough and generates enough revenue to be able to afford the regular payments for the loan.

Does microfinance really help people claw their way out of poverty? Nobody really knows. It certainly provides a service that people are willing to pay for. And it does so to people borrowing amounts too small for commercial banks to be interested. It could be that one of the biggest benefits of microfinance is that it forces people to set aside a small amount of savings as a condition of borrowing (this is an almost universal requirement). It also introduces people who were too intimidated to walk into a bank to the world of financial services.

10 asdf July 1, 2009 at 6:45 am

A thread on aid which fears to mention IQ is like a thread on space which fears to mention gravity.

It is the most important constraint on what can realistically be done.

11 Phillip Huggan July 1, 2009 at 4:52 pm

Ricardo, apart from small loan sizes, the main claim to fame of microfinance is microloans are given to people who don’t have collateral and banking services likewise. And it worked. Yunus discovered there is an entrepreneurial class among the poor, maybe 25%-20% of a population, that repays loans at or better than the rate of peolpe with collateral. The banks weren’t serving these people because they wrongly assumed collateral was a necessary behavioural prerequisite to paying off loans.
Andrew: true. Microfinance doesn’t work for 100% of a population.
asdf: a reason to educate the population and attack media and politician that needlessly lie.

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