Wednesday, September 27, 2006

Why things are the way they are.

Trying to understand why things are the way they are is much more difficult than expected.  Success and failure are not as easily forecast as anyone hoped.  Competing effects from external sources make it more difficult.

The Rich Steal from the Poor
For example, wealthy countries steal from Africa's poor through illegal fishing.  It hurts most those least able to stand the loss.  I've spent some time along with military folks at the village shore talking with the local fishermen.  They tell about the difficulties they face.  Commercial fishing vessels from the wealthier countries continuously and illegally over-fish the area.  Local fishermen have to go farther offshore to catch anything.  It's dangerous work in a dugout, going so far offshore.   Every year, more are lost to the sea while trying to feed their families.   
See Safeguarding African Fisheries, a UN report. 

A bit more directly
Former Wall Street economist Michael Hudson explains, his job on Wall Street was to be the balance and payments economist for Chase Manhattan bank in the 1960s. His first job there was to calculate how much debt third world countries could pay, and the answer was, "‘Well, how much do they earn?’ And whatever they earned, that’s what they could afford to pay in interest. And our objective was to take the entire earnings of a third world country and say ‘Ideally, that would be all paid as interest to us.’ ”

Good governance and the lack thereof
The wealthy and influential players in government knowingly withhold from the majority of their citizens.  "Public interest" is not part of the governmental focus.  Study it for yourself; it's perhaps the greatest stumbling block in Africa.

For example;  "There is no development strategy more beneficial to society as a whole - women and men alike - than the one which involves women as central players." -- Kofi Annan.   See the story of these children without school access and the women who made things change.

See The Feminine Face of Poverty - Seventy percent of those living in absolute poverty in our world -- that is starving or on the edge of starvation -- are female. Not only that, in our wealthy United States, women and children are the mass of the poor and the poorest of the poor.

 ... sketching the portrait of the typical poor African youth: “She is 18.5 years old. She lives in a rural area. She has dropped out of school. She is single, but is about to be married or be given in marriage to a man approximately twice her age. She will be the mother of six or seven kids in another 20 years,” said Ezekwesili, citing the findings of the latest edition of the annual World Bank publication, Africa Development Indicators (ADI).

The encroaching slums
For example, on the visibly increasing slum populations and the failed attempts of governments to address the problem, we find Every third person will be a slum dweller within 30 years, UN agency warns  - Biggest study of world's cities finds 940 million already living in squalor.

World-wide, people are moving from the country to the city, looking for a chance to work, and abandoning the rural farms that have formerly fed them.  Virtually every country  is changing, and the trend is troubling.

In many countries, the hope of a better life in the city is unfounded.  There's no work, and with farms abandoned, there's no food.  Often, only foreign aid prevents starvation.  It's a death spiral.  Aid programs often draw rural populations in and away from agriculture; some countries have lost much of their capacity to feed themselves.  Climate and other factors contribute to the decades of decline of African agriculture.

AIDS has taken a toll  on the agricultural community in Africa,  decimating the work force.  See the UN report on AIDS in Africa.  Knowledge is lost as the skills are no longer handed down generation to generation. 

"The demography of this epidemic is not well understood simply because, in contrast to most infectious diseases, which take their heaviest toll among the elderly and the very young, this virus takes its greatest toll among young adults. " 

This last decade, we crossed a world mile-stone
.  More than half of the world's population now lives in or around the cities.   ... a turning point in human history, says the UN.

The most difficult issue is the impact of global economic fluctuations; see Is it Murder?
Each year, more than a million Americans travel on service trips/mission trips as an introduction to the rest of the world.  It's their path to understanding the conditions in which most of the world live.  Is this a good idea?

Nobody knows for sure in simple terms, and reasons stated by the donor countries are not clearly or persuasively tied to the actual donations. 

Although its not clear precisely why donor countries give foreign aid, there is a possibility that the following conjectural reasons are perhaps involved:
  • Moral obligation to the poor-the desire to alleviate worst physical manifestation of poverty in the world.
  • Threat to national security- the widening gap between rich and poor nations pose a security threat as the poor may rise against the rich therefore causing unnecessary wars. The aid tries to bridge the gap between the rich and the poor.
  • To win allies-countries like Japan give more aid to countries that vote in tandem in UN voting
  • Expanding world trade-foreign aid may act as incentive to make a country become a stable consumer for the donor’s exported goods therefore widening the international customers
  • To promote democratization-donor countries give aid to countries exercising democracy and fail to give countries with dictatorship governments e.g. Zimbabwe
  • To promote literacy-to extend basic education and increase manpower training in skills which are basic to development.
  • To promote human rights-donor countries usually give aid to developing countries to improve the rule of law and good governance. They withhold aid for those countries, which engage in gross violation of human rights.
  • To reduce environmental degradation-developed countries give aid to promote environmental management and conservation of natural resources. This reduces global warming and other associated environmental problems
  • To alleviate effects of natural disasters-foreign aid is given to reconstruct countries adversely affected by natural catastrophe’s e.g. tsunamis, wars e.g. In Middle East countries like Iraq and Afghanistan.
  • Increasing Resources for Investment. The main macroeconomic mechanism by which aid can promote growth is to enlarge the pool of capital available for investment and growth. Even in a favorable policy environment, however, foreign aid may permit domestic resources to be diverted from investment to consumption, with no net effect on growth. Empirical studies of this issue, as was indicated earlier, have yielded inconclusive results. Studies of individual countries are equally inconclusive: aid seems to contribute to saving in some cases but not in others.
  • Providing Public Goods. Foreign aid might help raise the level of investment in the economy by easing the constraints on public funds available for necessary public investments--that is, goods that are important for production and for which the returns cannot be captured and used to repay borrowing; public investments may include infrastructure such as rural roads. Foreign aid might also limit the strains on the domestic tax base and prevent costly distortions. For example, the recipient might levy tariffs to fund those public investments if it does not receive aid.
  • According to the Agency for International Development, the success of foreign aid in supporting public investment also varies widely. The Inter-American Highway in Central America was funded largely through foreign aid (though it was not called that at the time), and it has contributed enormously to improving the prospects of growth for Central American countries. But such projects have also failed. Many aid-financed projects languished after their completion, because the recipient government was unwilling or unable to provide adequate maintenance.
  • Increasing Human Capital. Foreign aid might be able to help a country develop its human capital--for example, by supporting elementary education or basic health care. Investment in human capital in developing countries is often more difficult to finance than are physical capital projects. Even in relatively rich countries, private investors are wary of lending for skills and education without a government guarantee for a return on investment. Foreign aid, however, may be able to provide targeted funds for enhancing human capital and thereby raise the economy's stock of skills and, perhaps, stimulate growth.
  • Foreign aid can claim some credit in this area. Aid resources have helped strengthen agricultural production by funding new crop varieties, irrigation programs, and extension practices. They have also played a role in sponsoring research, education, and immunization programs that have led to the control of various diseases such as smallpox, polio, diphtheria, and measles.
  • Ingredient of development-it supplements scarce domestic resources, helps transform economy structurally and contributes to the achievements of less developed countries take-offs in to self sustaining economic growth e.g. Taiwan, Israel which took-off as a result of foreign aid.
  • Military Assistance. Provides grants and loans that enable the government to purchase military equipment from the donor countries. Aid provides grants to countries for training foreign military officers and personnel. Funding for military-to-military contact programs and some peacekeeping operations also belongs in this category
  • Facilitating the Transfer of Technology. Another channel through which aid might foster growth is technical assistance and technology transfer. That type of aid promotes growth not by accumulating greater resources but by making existing resources more efficient and effective. Technical assistance programs may also include educating and training government officials who play a large role in creating the policy environment and using foreign aid. Helping developing countries to organize institutions that protect property and minority rights is another example. As in other cases, the success of such programs will probably depend on the political and economic environment in which they operate. For example, according to some analysts, "assistance to encourage agricultural production had a substantially higher payoff in the presence of realistic exchange rate and trade policies.
  • Aid has serious, distorting consequences in the political life of recipient countries. Aid is generally transferred to the government of those countries, which tends to increase the government's power, resources, and patronage relative to the rest of society and, consequently, the stakes in any struggle for control of that power. People will spend relatively more of their time focused on the outcome of political and administrative decisions, thereby diverting attention, energy, and resources from more productive outbreak of civil armed conflict.
  • In many cases, foreign aid has sustained governments in their pursuit of economically counterproductive political and economic policies. Such policies include the persecution of particular groups, restrictions on private trade and the inflow of private capital and enterprises, confiscation of property, price policies that discourage agricultural production, and the expropriation of foreign capital and enterprises. To add insult to injury, when the pursuit of such policies worsens the economic performance of an aid recipient, the country may qualify for still more aid because its situation is deteriorating.

Aug 26, 2011
A Debate on the Role of Microcredit in Supporting Women and Girls
by Tim Ogden

Barbara Magnoni, President of EA Consultants, an international development consulting firm with a specialty in finance, began a debate in the comments of our interview series with Abhijit Banerjee and Esther Duflo. Our conversation was focused on the issues around investing in microcredit focused on women. I asked Barbara to join me in an asynchronous “debate” that would be a bit more accessible than a conversation in the comments. Herewith is our discussion on the subject. Please weigh in with your own thoughts either in the comments or on your own blog of choice (but be sure to tell us where to find your thoughts via the comments or on Twitter). 

Barbara: I read your interview with Esther and Abhijit with interest. At one point you comment: “On average women entrepreneurs’ businesses don’t grow. But you dig a layer beneath the headlines and you find that a lot of women entrepreneurs don’t want to grow their businesses. They only want to work a few hours a week, that’s all they have time for and they need a lot of flexibility. Women like that are shut out of traditional labor markets so they start their own home-based business.” That caught my attention.

We worked on a study in Latin America on women entrepreneurs and didn’t find this at all. In “A Business to Call her Own”, we spoke to women throughout the region and found that it isn’t that they didn’t want to grow, but that they were severely constrained by the choice of sector they went into, their limited time, limited savings to use to make capital investments, and low skill levels. If you have a business that is ‘hand to mouth’ you want it to grow. Maybe not to become a huge company, but to become sustainable and offer a decent living for your family.

I would be interested in any further substantiation of your views. The issue of women and business is understudied, and is clearly linked to many of the issues posed in your interview.

Tim: I agree that most microentrepreneurs want their businesses to be self-sustaining and to generate cash flow (though their profitability seems to depend entirely on whether you account for the cost of family labor, see Poor Economics and David McKenzie on this). But there doesn't seem to be much evidence that microentrepreneurs, women or men, aspire to grow their businesses to the scale that would have a societal impact or push a family into the middle class. When they do have access to fresh capital, they don’t seem to invest much of it in their businesses. Surveys tend to indicate that their aspiration is for a job, not to run a growing business.

Certainly this isn’t true for everyone but it is true for many. And if the evidence from developed nations is any guide, then it is more likely that men aspire to build these larger, truly profitable businesses. For the evidence for this claim, see Scott Shane’s book The Illusions of Entrepreneurship, pp 130 to 133, where he cites more than a dozen studies.

One of the explanations that is consistent, as you note, is that women tend to run businesses in industries that have less profit potential. In some cases this is clearly a societal construct around “appropriate” women’s work (see for instance McKenzie’s work in Sri Lanka), but it’s also likely that it has something to do with the choices women make about what industries to be in—in other words they choose low-profit, low-growth businesses because those are the ones that offer the flexibility they need to be able to meet their other commitments.

This is not an argument for restricting women’s access to capital. But it is an argument to think very differently about the value and purpose of microcredit focused on women. I believe it’s a mistake to think of such a product as entrepreneurial growth capital.

Barbara: I am still skeptical of this evidence. I don’t have the book handy, but it seems to be focused on only developed markets. In many of the developing countries that I work, formal sector wages for similar skilled people are lower than those in the informal sector and many SMEs pay their employees under the table, so they aren’t often in the formal sector, although they are employed rather than independent workers.

While I agree with many of your points, I am concerned that the limited recent research is leading to recommendations that promote lending to men’s business for growth rather than betting on women. Perhaps it depends on your goals, but I think that women’s businesses (some, not all) could be equally if not more successful with some capital, and additional support and mentoring. If we give up on that possibility, we give up on trying to reduce the gender gap, and promote the status quo, of men earning money and women in the household with limited financial resources. I believe development experts over 30 years ago agreed that this economic structure was not ideal in providing families with health, food and education they needed.

Of course another approach would be to work to change men’s role in the household so that they take on greater financial and family responsibilities, and thus prioritize those expenses more, but that may just lead to research saying that people shouldn’t provide men with investment capital, because they won’t put it to work.

I think ultimately, we don’t know enough and more research should be done around these questions.

Tim: We certainly agree that there isn’t enough research on this topic. As is all too common in development circles, the prevailing view seems to have swung from one distortion (ignoring women) to another (“we must focus on women and girls”).

In this case, I think that distortion isn’t exactly harmful but it isn’t helping. Here’s my operating hypothesis: as family incomes rise, families invest more in all their children, boys and girls. That investment often yields much higher levels of schooling for girls which in turn increases their opportunities.

If you accept that hypothesis, it makes sense to focus on raising family incomes in the fastest way possible. That in turn suggests that we should be paying attention to what groups generate the highest returns on capital. Given the status quo, that again implies that it makes a lot of sense to provide working capital to male entrepreneurs—and then work with them to encourage them to invest in all of their children.

For me, that’s as plausible a path to both increasing family welfare and addressing gender imbalances as focusing microcredit outreach on women who, until you change societal norms, will likely earn very low returns on capital and raise family incomes less.

I think you also have to take into account sociological research from around the world that men’s behavior in terms of investing in their families is strongly affected by their ability to be productive and be providers—in other words, to live into the existing societal norms. When men do not have opportunities to work and provide, they tend to abandon a role as investors in their families. By excluding them from access to credit in favor of their wives, we are creating a self-fulfilling prophecy about the behavior of the men.

In sum, I support working to address gender imbalances and creating equality of opportunity for men and women. But I think pursuing that goal via a “preferential option for the poor women” (to paraphrase from the liberation theology movement) isn’t the best way of achieving that goal.

Barbara: Your doubts about development practice focusing on women and girls are justified. That is, there is just as little proof that this is a useful strategy as there is that lending money to men will only drive them to drink and gamble it away (another popular and anecdotally common hypothesis).  However, what is extremely real is the discrimination and power inequality of women in many poor households. Family violence, low self-esteem and inaccessibility of land rights are only some of the conditions we run across frequently in women in our work. In your operating hypothesis above, you don’t take into account these issues but look only at financial wellbeing as a sign of development of socioeconomic wellbeing. Additionally, you suggest those who currently wield the greatest power in the family should continue to do so, by supporting their earning potential over that of others in the family. I suggest that this is flawed from a humanistic perspective. I believe that we should strive to ensure that women and men have freedom, opportunity and choice. These are critical aspects of a developed society.

A final point about your hypothesis. It assumes that in general, men will prioritize the welfare of their families, and thus their wellbeing will trickle down to that of girls. I think like most trickle-down theory, there is some truth to this, but the practical reality is that it is all too slow and that it often leads to more inequality. I have some suggestive evidence that men don’t re-invest as much of their business profits as women into the family.  Without parallel efforts to encourage such investment by men, the “return on capital” for men’s businesses may be quite high in terms of the “math”, but low in terms if you look at the return to the welfare of the family. In the paper I note above, we interviewed male and female merchants in Nicaragua and found that men more often save to reduce their cost of capital while women more often save to plug up gaps in the family economy, pay for schooling, and make up for economic downturns. In the same study, we notice that men’s savings balances went up during economic crises, while women’s fell.  In sum, doing the math is useful, but probably not sufficient when thinking about who to support and how.

Tim: There are important questions that remain to be answered on family dynamics (and they may have very different answers based on a variety of cultural, geographic and economic contexts). Your point about women spending relatively more of their income on the family is true as far as I know but I think fails to take into account the dynamics of family dynamics. As I discussed with Esther in the interview, she and Chris Udry have found suggestive evidence that this disparity is a cultural construct. In other words, women spend more on families because caring for families is “women’s work.” As women gain disposable income from growing businesses their spending may end up looking more like that of their husbands. In other words, changing the cultural constructs that limit women’s opportunities may very well erode the basis for the difference in spending patters of men and women.

In terms of the research in Nicaragua, I find it very plausible—but it also underlies the basic point about how to think about investing in women via microcredit. The behavior of men you describe is consistent with what we would expect of entrepreneurs who were focused on growing their businesses and generating increased profits. The behavior of the women is not. Thus, thinking about microcredit focused on women as entrepreneurial capital—e.g. capital designed to foment growing, profitable businesses—may be in part contradictory. So if the goal is increasing the welfare of women and girls, why not look instead to direct cash transfers rather than requiring these women to start businesses with all the attendant demands that takes?

That’s were I return to my basic suspicion that microcredit dressed up as encouraging microenterprise for women is a poor way of achieving the stated goals whether those goals are benefiting women and girls or those goals are creating growing, profitable businesses.

Barbara: Ouch! So women and children at home getting handouts, huh? Well, that may get them better fed, but will it help women achieve more freedom? I look forward to hearing what others say.