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Great review of Dambisa Moyo’s book, Dead Aid

July 23rd, 2011

If you haven’t noticed ;-), there is a very healthy debate going on about whether our current approaches to international aid (and in particular, rich country government to poor country government block grants) is working or not to help these poorer countries grow their become less poor.

This is actually a very timely topic. Why? Because as rich countries cut back their spending to get fiscally responsible, aid budgets are going to get cut and so there’s a great opportunity (remember Rahm’s “let’s not let a good crisis go to waste”) to evaluate whether there’s a better approach.

Read: Bill Easterly’s review of Dambisa Moyo’s book, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa

Moyo is a Zambian economist and this book has caused quite a stir as she comments very knowledgeably on what’s happening in Africa challenging the status quo of “more aid is the solution to Africa’s problems.” And she’s NOT a white middle-aged male.

Bill Easterly recently shared this review of Moyo’s Dead Aid book which he wrote back in 2009 on commission from London Review of Books. LRB chose not to published it (reason not disclosed), so he has has released it on his own.

I have previously reviewed Bill Easterly’s book, The White Man’s Burden: Why the West’s efforts to aid the rest have done so much ill and so little good. Easterly is one of the most vocal critics of the lack of results (and often negative results) delivered through government-to-government aid, so his book review is, as expected, generally positive although not wholly so.

I also recently reviewed Poor Economics: A radical rethinking of the way to fight global poverty by Abhijit Banerjee and Esther Duflo which supports some of Easterly’s conclusions on the (lack of) existence of Jeff Sachs’ (The End of Poverty) “poverty trap” concept, but also refutes some of them.

I also reviewed another book on Africa and aid called The Trouble With Africa: Why Foreign Aid Isn’t Working by Robert Calderisi which share additional facts and perspectives.

Please post to comments for other perspectives on this topic and/or other books worth reading.

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Book Review: Poor Economics – Part II

June 22nd, 2011

Poor Economics: A radical rethinking of the way to fight global poverty

By: Abhijit Banerjee and Esther Duflo

This is a continuation of my book review. See Part I of book review >

Here are a few highlights I took away for the book:

  • Most poor aren’t hungry. Despite what the experts say. Generally, the poor don’t eat more even if you give them food. There is though an age-old issue of micronutrient deficiencies in poor people’s diet. So, it’s a “quality” issue, not a quantity issue with lots of complicated behaviorial challenges to overcome.
  • Demand is low for many beneficial things. Many poor could afford water purification products and bed nets but don’t make them a budget priority. Much of this is based on focusing resources on the short-term.
  • Paying people to take vaccines can be cheaper. One of the biggest issues for global health is how few children complete a full series of vaccines leaving them unprotected and increasing drug-resistance for diseases. They have found in a trial that it is actually cheaper to provide gifts to mothers who get their children vaccinated and they get more compliance. Read for the details.
  • Making public good things free and the default. The authors argue that governments should make things like preventative care free, required and of consistent quality. Sounds paternalistic? Yep. They argue that those in the rich world are constant beneficiaries of paternalism that we hardly notice it!
  • Unconditional cash transfers to poor families work. We’ve heard about popular (and statistically effective to help people out of poverty) programs in South/Latin America like Mexico’s Oportuniadades which provide grants to poor families on the condition that they do things like ensure their kids are in school. Two studies have found that without these conditions that the poor still send their kids to school, etc.
  • Most poor people want a job, not a micro business loan. Despite what many microfinance advocates say, most self-employed do so out of necessity, not out of choice. Jobs bring more security which enables poor families to plan and invest for a brighter future.
  • Microcredit has high marginal ROI, but low overall ROI. Since most poor who take microcredit loans are underemployed, any capital can often quickly improve their income (think: having inventory on their store shelves). But most micro-businesses stay micro as they have insufficient capital to get to the next level. And micro businesses equal micro incomes. Better than no income, but not the jackpot.
  • Many poor parents don’t treat their children equally. They look for early signs of who might be “smarter” and often focus their resources on a single child’s education. They do this because they undervalue a smaller amount of education and overvalue a larger amount of education. Lots of parental expectations need reseting.
  • Micro insurance for the poor is a hard sell. Despite all the interest by promoters in the space. The poor don’t value insurance services enough to be willing to pay premiums, which results in the insurance pool being skewed to the higher risk people raising premiums further … a downward cycle. And then there’s fraud. Their conclusion: micro insurance will only work with government subsidy. Sounds like farm insurance in USA and EU?
  • Most poor need structure to save. If money sits around, it gets spent on other things, so the best savers amongst the poor are those who immediately invest their profits. Lots of good examples in book of structured savings. We know in USA that having opt-out approaches to things like auto-deduct-from-paycheck 401(k) savings programs result in much more saving than opt-in programs. We’re all human and subject to temptation.
  • Building small businesses into bigger businesses is very rare. There are always publicized examples of a poor entrepreneur who defied all odds to build a big business from scratch. But these are extremely rare — especially in developing markets. Most poor don’t even have the ambition for this.
  • Most small/micro business owners don’t benefit from training. Yep, that’s right. Mostly because they don’t care that much about growing their business because growing a business is very hard and not likely to succeed. This is unwelcome news to the many NGOs who believe that this is an important intervention.
  • Non-agriculture growth is more beneficial than agriculture growth. When a factory locates near a village, it most often results in faster wage growth than agricultural productivity growth resulting from innovations like the famed Green Revolution. Why? Because higher-paid employment becomes available even to those with low skills.

Summary of authors’ learnings

  1. The poor often lack critical pieces of information and believe things that are not true.
  2. The poor bear responsibility for too many aspects of their lives.
  3. There are good reasons that some markets are missing for the poor, or that the poor face unfavorable prices in them.
  4. Poor countries are not doomed to failure because they are poor, or because they have had an unfortunate history.
  5. Expectations about what people are able or unable to do all too often end up turning into self-fulfilling prophecies.

I’ve only covered a small portion of the book’s content. I recommend that you read it for full benefit.

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Book Review: Poor Economics

June 22nd, 2011

Poor Economics: A radical rethinking of the way to fight global poverty

By: Abhijit Banerjee and Esther Duflo

This is one of the best books I’ve read on addressing global poverty. And I’ve read a LOT of books on this topic. It summarizes a massive amount of primary in-the-field research and has lots of interesting finds which will surely challenge some of your assumptions on effective poverty programs. The authors founded Abdul Latif Jameel Poverty Action Lab in 2003. Also, there is a book website.

What works; not what you think should work

I was impressed with the authors’ focus on “what actually works” based on empirically validated experiments and data. This is very refreshing in a world where so many people approach poverty with pre-determined viewpoints. I particularly like how they compare, contrast and critique the two primary international development perspectives of “supply wallahs” (Jeff Sachs & co) and the “demand wallahs” (Bill Easterly & co). The authors (both economists) seek to test whether there are specific poverty traps (Sachs’ concept which Easterly contests) in specific situations. Their conclusion — sometimes there are and other times there aren’t. It just depends on the specific situation.

Similarly they critique the pessimism of both the political left and the right who (for different reasons — colonialism or unfortunate culture) think that political institutions in these countries must change first and they won’t. They look for pragmatic steps forward in both good and bad political regimes.

Progress generally comes incrementally and at the margins

They are not idealists. The authors are realists who believe that improvement comes incrementally at the margins. It is all about the small stuff which adds up. Much of what works isn’t “sexy” and therefore isn’t easy to raise donor money for. Some of the successful approaches they’ve discovered are counter-intuitive at first and many are far from perfect. But they are committed to taking a scientific approach and to judge things by their results and to learn as they go.

There are far too many excellent facts in this book to cover in a short review. So, I will call out a few as illustrative and recommend that you read the book for the full benefit.

Focus on testing specific interventions (with randomized controlled trials)

“This book will not tell you whether aid is good or bad, but it will say whether particular instances of aid did some good or not.” One of the big issues with aid is, how do we know what interventions are effective? or more effective than others?

Read Part II of book review >

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Portfolios of the Poor book review

February 21st, 2010

portfolios of the poorRecommended Reading

Portfolios of the Poor: How the World’s Poor Live on $2 a Day

by Collins, Morduch, Rutherford & Ruthven

This recently published book has got a lot of buzz amongst the microfinance industry as providing new insights into the actual financial activities of < $2/day (key UN definition of very poor) families.  The book includes the one-year financial “diaries” of 250 families living on $2/day in Bangladesh, India and South Africa painstakingly collected by researchers after building trust with families to share their daily financial transaction details.  These are summarized into cash flow and household “balance sheet” statements to analyze the fascinating volume and scale of financial transactions which these families  juggle in order to survive, and occasionally thrive.

There are a lot of good insights in this book and I recommend it for those who value data in order to design innovative and helpful financial services for base of the financial pyramid families.  Here are a few highlights I noted:

  • Every family had both loans and savings
  • Families accessed on average of 8-10 different financial instruments in the year
  • Cash flow turnover was up to 300-500% of total net income
  • Incomes are not just low, but also uneven and unpredictable … creating higher complexity to manage cash
  • Families often borrow even when they have savings
  • It is not uncommon for savers to pay interest/fees rather than receive them to those holding their savings
  • Moneylenders are often used for short-term loans … interest paid perceived as a convenience fee rather than interest rate
  • Flexibility/adaptability is a critical factor when the poor select financial services
  • Financial transactions outside the formal financial system (including MFIs) greatly outnumber those with MFIs
  • The downsides of informal financial transactions:  unreliability, lack of privacy, lack of transparency

Poor households would benefit greatly from reliable, convenient, reasonably pricing “formal” financial tools to help with:

  • daily cash flow management
  • savings (for long-term needs)
  • borrowing for flexible uses

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Slavery book review

December 6th, 2009

phuleSlavery
by Mahatma Phule

Slavery was written around 1900 as an expose on the caste system in India. As a reformer and social activist, Phule (along with his wife) advocated for women’s education and sought to bring light on the devastating “slavery of the mind” which enabled the upper caste peoples (particularly the Brahmin caste) to control and continue impoverishment of the vast majority of Indian people using the Hindu religion.

Ambedkar, one of the father’s of India independence (author of the Indian constitution and himself a dalit … aka Untouchable), condemned the Hindu religion which he referred to as Brahminism … essentially the worship of Brahmins.

I have included PDFs of the Slavery book as, although I have a hard copy, it is no longer in print and very hard to find. I found this copy on-line, but the website which published it is quite unreliable.

Related posts on the India caste system:

Slavery by Mahatma Phule

DEDICATED TO THE GOOD PEOPLE OF THE UNITED STATES
AS A TOKEN OF ADMIRATION FOR THEIR SUBLIME DISINTERESTED AND SELF SACRIFICING DEVOTION

in the cause of Negro slavery;
and with an earnest desire,
that my countrymen may take their noble
examples as their guide in the emancipation
of their Sudra Brethren from
the trammels of Brahmin thraldom.

Please post comments on what you think of this and whether it is relevant for today.

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Out of Poverty book review

December 5th, 2009

out of povertyRECOMMENDED READING

Out of Poverty: What works when traditional approaches fail
by Paul Polak

Polak, a psychiatrist by training, shifted his full-time efforts to working on poverty over 25 years ago.  He founded International Development Enterprise to focus on helping small, developing country farmers earn more income.  IDE has already helped millions of very small farmers earn their way out of extreme poverty in countries including Bangladesh, Cambodia, Ethiopia, India, Myanmar, Nepal, Vietname, Zambia and Zimbabwe.

While this isn’t the best written book (the content could have been delivered in less than half the pages), the content is worth hearing.  Polak recounts many stories of individual farmers, their challenges, their failures and their triumphs.  The net is you’ll understand some better facts about smallholder farmers and what practical ideas will help them step out of poverty.

Getting the facts right

Here’s the tone of the book quoting from the preface:  “I hate books about poverty that make you feel guilty, as well as dry, academic ones that put you to sleep.  Working to alleviate poverty is a lively, exciting field capable of generating new hope and inspiration, not feelings of gloom and doom.  Learning the truth about poverty generates disruptive innovations capable of enriching the lives of rich people even more than those of poor people.”  Polak believes that we (in the West) are misinformed about why the rural poor stay poor and why most of our efforts don’t help them.

Polak’s Three Great Poverty Eradication Myths:

  1. We can donate people out of poverty.  Polak provides many examples of how well meaning donors have continued to invest billions of dollars in places like Sub-Saharan African with zero net impact on poverty over the past decades.   He notes, “more people are beginning to realize that making it possible for very poor people to invest their own time and money in attractive, affordable opportunities to increase their income is the only realistic path out of poverty for most of them.”  Needless to say, he is not impressed with Jeff Sachs “more of the same” approach to bigger and bigger donations … especially through governments.
  2. National economic growth will end poverty.  Most of the GDP growth in developing countries is happening in the urban environments and it is concentrated amongst a small sliver of even those urbanites.  He notes that growth is a requirement, just not sufficient by itself.
  3. Big business will end poverty.  From his experience, he disagrees with folks like C.K. Prahalad (The Fortune at the Bottom of the Pyramid), that many large businesses will end up serving the poor.  Most of them just can’t adjust to the ultra high-volume, low-margin approach required to serve these customers.

Poor people are poor because they don’t have enough money

Kind of obvious … it’s what the poor tell you when you ask them … but Polak argues that the “poverty experts” have much more complicated answers which is why they are so often distracted from actually helping the poor become not poor.  Poverty experts argue that the poor are poor because (a) they don’t have power; (b) they are uneducated; (c) they get sick/disease too often; (d) they need clean water; (e) they need better seeds/fertilizer (or no fertilizer); etc. etc. etc. and the granddaddy of all … they need ALL of these things before they can have any hope of moving out of poverty.  Polak argues that “finding a practical solution requires a different strategy … finding the simplest single ‘lever’ capable of producing the biggest positive result.”  The answer is – increasing income.

#1 Way for Small Farmers to Earn More Money

Polak believes that growing high-value vegetables, fruits and herbs as a cash crop during the dry season using drip irrigation is the #1 opportunity for small one-acre farmers (and even “landless” people) to earn upwards of $500/year which is enough to start them on the positive cycle towards getting out of < $1/day poverty.  IDE has focused R&D on building a drip and sprinkler irrigation products affordable and sturdy enough for these farmers.  Combining this with their affordable treadle pumps and a few other inventions to assist with water movement and storage, provides a scalable, practical solution.

Here are some additional highlights that I gleaned from this book:

  • 800 million people live on developing country small farms.  Vast majority of these $1/day people have one-acre farms with poor soil and no irrigation.  Their main crops are rice, wheat and corn and they usually can’t produce enough to feed themselves.  If they have access crops left over when they sell it in the market, these crops rarely generate more than $200/acre which isn’t sufficient to move them out of poverty.  Hence, they are stuck indefinitely.
  • Get on the ground with the poor.  We spend so little time actually gathering first hand data from the poor.  So many “solutions” are designed from behind desks often 1,000′s of miles away. Get close, observe and ask questions and you will see the simple and obvious things that are needed and can be done in a specific context.
  • Affordability is #1.  The poor must be able to afford to pay fair market price for the tools to enable them to earn more income.  This is the ONLY solution that will scale to help millions and will keep on being available.  The measurable benefits must be realized in months and ROI within a year.  For products designed to serve the poor, “Affordability isn’t everything.  It’s the only thing.”
  • Price subsidies make things worse.  He argues with examples of how subsidizing goods and services almost always ends us making poor people worse off … and this includes food.
  • The green revolution will come later to small farmers.  First they need to get affordable irrigation.  Then they need to have enough savings/income to afford the more expensive inputs.  And then they need to have enough resources to not be financially devastated if there is ten-year flood/drought.  So, it will come, but later.

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The Bottom Billion book review

May 20th, 2008

thebottombillionThe Bottom Billion: Why The Poorest Countries Are Failing and What Can Be Done About It
By Paul Collier

When a book is recommended by both The Economist (more conservative) AND George Soros (quite liberal), it is bound to be interesting … and this book did not disappoint. Collier is a British economist and former research director at the World Bank with a particular focus and experience on Africa. By training and interest, he is a statistician which he states clearly and explains that he’s just “sharing the numbers.”

Looking at the world the wrong way

He starts off by stating that he believes we’re looking at the world (from the perspective of economic development) in the wrong way. The current mainstream way of viewing the world is that there are 1 billion rich people and 5 billion poor people. He says that a better way to look at (and understand the world) is that there are 1 billion rich people, 4 billion people well on their way to becoming rich and 1 billion people who are poor and becoming [absolutely, not just relatively] poorer. That is, about 4 billion people live in countries where they are seeing incredible economic growth rates which if they continue will in the next few decades bring the vast majority of their citizens out of poverty and into the middle class. [See my previous post, Is the world getting better?]

He focuses on this “bottom billion” people who live in some 58 countries who are stuck and not participating in the benefits of economic development through globalization and other means. Their reality is more the fourteenth century way of life … civil war, plague and ignorance. These people are concentrated in countries in Africa (70%) and Central Asia. In 2000, these 1 billion people were poorer than they were in 1970. The typical person in these countries has 1/5 the income of the 4 billion people in other developing countries. He believes this problem is denied by the development biz (aid agencies and their contractors) and the development buzz (what he calls the “headless heart” generated by rock stars, celebrities and NGOs). He argues that the traditional approaches of conservatives and liberals are both failing and a new approach is required based on what we’ve learned and what we know.

Growth is good

When he was at the World Bank, his research department produced a controversial paper called “Growth Is Good for the Poor.” The paper points out that “the central problem of the bottom billion is that they have not grown. The failure of the growth process in these societies simply has to be our core concern, and curing it the core challenge of development.” He says that we should not be indifferent to how an economy grows, but that the exaggerated suspicion of growth (now often a bad word which must be prefaced by “sustainable, pro-poor”) by those who are concerned about development. He critiques this view by stating that “the problem of the bottom billion has not been that they have had the wrong type of growth, it is that they have not had any growth. The suspicion of growth has inadvertently undermined genuinely strategic thinking.” He goes on to state, “we cannot make poverty history unless the countries of the bottom billion start to grow, and they will not grow by turning them into Cuba … a stagnant, low-income, egalitarian country with good social services.”

What is causing these one billion people to be left behind?

Collier has identified four traps which he believes must be recognized and addressed in order for these countries/people to break out of their condition of ongoing misery caused by poverty. I have made a few highlights on each of the traps:

(1) the conflict trap

  • 73% of these countries are in (or have recently been in) a civil war
  • Civil war is much more likely to break out in these countries — have the starting income per person and you double the risk of civil war
  • The rebels are almost always as bad in governance as their targeted incumbents … their social justice messages are rarely made a priority if they get into power
  • Natural resources help to finance conflict (and sometimes motivate it)
  • Ethnic minorities are just as likely to rebel with or without discrimination
  • There is no statistical significance on likelihood of civil war based on income inequality or whether or not it had been a colony of another country
  • Civil war reduces growth by about 2.3% per year and typical war is 7 years

(2) the natural resources trap

  • 29% of the bottom billion live in countries where resource wealth dominates the economy
  • The “resource curse” works like this … resource exports cause the country’s currency to rise in value against other currencies … this makes the country’s other export activities less competitive … yet these other activities are often key for technological progress. This can work while resource demand is high, but there are always downswings.
  • Needed reform (and diversity of economic development) is very difficult to get support for during resource boom times and almost impossible during down cycles.
  • The heart of resource curse is that resource rents (ability to earn excessive profits during boom periods) make democracy malfunction when resource profits are at or above 8% of national income. He asserts that in these situations autocracies outperform democracies by a large margin.
  • Both democracies and autocracies with resource abundance underinvest their profits and invest them badly.
  • Democracy is critical yet insufficient … politicians need to exercise restraint rather than the usual practice of obscene levels of patronage.

(3) the trap of being landlocked with bad neighbors;

  • 38% of the bottom billion are in landlocked countries.
  • Neighbors matter…the economic health and infrastructure of your neighboring countries are particularly important for these countries…both as export markets and necessary transportation routes to other export markets. Growth does still over.
  • He makes multiple suggestions for how to break this trap … all which take bold intentional policies.

(4) the trap of bad governance in a small country.

  • There is not much popular enthusiasm for economic reform (think: making medicine) because it has unfortunately got a bad reputation and people are inpatient.
  • These “failing states” are both failing their citizens and are increasing the likelihood of falling into the conflict trap.
  • A failing state is more likely to experience a turnaround the larger its population, the greater the proportion of secondary educated and has recently emerged from a civil war. Interestingly, democracy and political right didn’t seem to be an important factor.
  • The average time it takes to turnaround a failing state is 59 years!

He also notes that even once countries break through these traps, it is now harder for them to compete in the global market as they are latecomers to the globalization party. He reminds those against globalization though that our last experiment with retreat of trade, capital flows and migration (1914-1915) was a ghastly experiment. So, we need to figure out ways to provide on ramps for the bottom billion to participate in growth afforded by global markets.

The weakest part of his book is his recommendation that we rely on the G8 (group of 8 large economy countries) forum to implement his ideas. This is just not going to happen. The G8 forum has proven to be ineffective for almost everything it is supposed to address to date that I have little hope for a miracle here. So, while I think Collier has challenged us with some helpful data and insights to that data, we need additional new thinking on how to engage with these ideas and get them into the mainstream political forum … to make helping the bottom billion escape from their traps a reality rather than a dream.

See also Mark Lange’s series of articles which cover more of Collier’s ideas.

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A Billion Bootstraps book review

February 20th, 2008

billionbootstrapsA Billion Bootstraps: Microcredit, Barefoot Banking, and the Business Solution for Ending Poverty

by Phil Smith and Eric Thurman

I think this the best book that I’ve read so far which provides an introduction to microcredit which is designed for a non-industry expert and, more specifically, for someone who is looking to get involved in microfinance.

It is genuinely co-authored with each author writing alternating chapters. Eric Thurman is the industry expert having previously led two leading multi-country microfinance organizations, Opportunity International and HOPE International plus Geneva Global, an interesting group which advises/supports philanthropists in international giving strategies. Phil Smith is a successful oil industry entrepreneur who tells his story about learning about microfinance and how and why he is now such a passionate investor.

A couple of highlights from my reading:

  • They argue that we should expect higher returns on our philanthropic $, not less than our financial investment returns. They note how people invest philanthropic $ too much with their hearts rather than their minds and that’s why there is such little impact usually made by those investments. Accountability to quantified results is needed in philanthropy.
  • Their rule of thumb is the capital required to help a family out of poverty through microcredit is approximately the level of average annual income per capita of the borrower’s country (GNI per capita).
  • Microcredit has dramatically lower cost-per-life (CPL) impacted “return” than any other kind of investment they could find. They estimate that this could be as little as 1% of per capita GNI based on 20 loans cycles (1 every 6 months for 10 years) and an average family size of 5. Even if you conservatively discount the impact, it likely not more than 10% of per capita GNI.
  • In the Democratic Republic of Congo, the average income is $120, so the CPL would be 1-10% of that or $1.20 to $12. Wow! It is an order of magnitude (10x) more expensive in middle income countries (e.g. Eastern Europe) and two orders of magnitude (100x) more expensive in developed countries. So, if you are looking for maximizing your CPL…low income countries are the best investment by far.
  • They present the concept of “microcredit plus”. They prefer the term “microcredit” over “microfinance” as they see the credit piece as the driver and everything else that is added on is part of the “plus”. They are strong supporters of the “plus” services that can accompany and complement microcredit … but leave that up to you to decide what matters to you.
  • They provide a list of some of the major international microfinance organizations along with some very good advice of how you need to do your own due diligence to find out what their true overhead is. Eric, the industry expert, says it is not unusual to be 50% or more!
  • They provide a list of ways you can invest/participate in microcredit. This is a good summary of your general options … although you’ll still need to do a bunch of homework.

What I think is missing from the book:

  • There continues to be too much focus on telling the stories of how the exceptionally rich are doing philanthropy … the Gates, Buffetts, Omidyars, etc. which while maybe inspirational is frankly pretty irrelevant to the rest of us. Then there’s the only very rich examples of ex-bankers, etc. We need people who are telling more stories of ordinary individuals like the rest of us making a difference.
  • This book is very focused on supporting the impact of microfinance through donations even though they extensively use the “investment” language to describe your donations strategy. They do note that some people are making loans to provide capital for microfinance, but this is more of a side note. I think that there needs to be more written about helping people take a more holistic approach to “investing” in social impact which includes both philanthropy (donations/volunteering) and investing with the opportunity for capital return (and possibly a profit.)

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Creating a World Without Poverty book review

January 29th, 2008

Creating a World Without Poverty: How Social Businesses Can Transform Our Lives
by Muhammad Yunus

Muhammad Yunus, 2006 Nobel Peace Prize recipient, has recently released his second book, Creating a World Without Poverty. The centerpiece of this book is Yunus proposal for a new kind of institution called a “social business” which is a for-profit business which has as its top objective a social objective/mission. Yunus makes a passionate argument for the benefit and role of social businesses in helping us move extreme poverty to museums.

I have written a fair amount on Muhammad Yunus, Nobel Peace Prize winner and his first book, Banker to the Poor on my blog. Yunus is an incredible innovator and one of my current day heroes who has made a huge impact on addressing global poverty. So, I was eager to read his new (and second) book.

While I do recommend reading this book, I would call this less of a book and more of a collection of stories and speeches on topics with a little more detail thrown in than a speech generally allows. So, don’t be expecting something “integrated”, but a bunch of Yunus’ current thinking and favorite topics.

Social Business. The centerpiece of this book is Yunus’ concept of a social business. His argument is that humans are actually interested in more than self-interest … they are also interested in helping others. Traditionally, there are 3 primary organization types: (i) for-profit businesses; (ii) non-profits/NGOs and (iii) government. He is proposing the need (and opportunity) to launch a new entity, a social business, to serve the needs of the world’s poorest citizens.

Yunus has a rather specific and narrow definition of the term/concept of a “social business.” Yunus defines two kinds of social businesses: (a) a business which is owned by the poor; and (b) a business where investors are only allowed to receive back their capital invested (that is, no additional return whatsoever.) He primarily focuses on (b) where the primary objective of a social business is a specific social objective plus it must be self-sustaining (i.e. generate financial surplus) in order to provide on-going and growing fulfillment of its social mission. Type (a) social businesses can be pure profit-making machines with the benefit to the poor provided through the profit surplus. Or social businesses could be both type (a) and (b) like Grameen Bank.

Yunus sees no room for businesses with owners/investors (other than poor people) which earn a profit (he calls them profit-maximizing) calling themselves social businesses or having any long-term potential for delivering much social benefit to the poor. He believes that the profit motive will always win-out and these hybrids will ultimately not serve the poor. He also assesses other examples of organization formats to help the poor including coops and NGOs. [See separate response to Yunus' social business concept.]

Social Entrepreneurs. Yunus defines social businesses as a subset of the larger social entrepreneur segment. That is, all social business operators are social entrepreneurs, but not all social entrepreneurs run social businesses. That is, what they do is either not run as a for-profit/sustaining business and/or it doesn’t meet his criteria for a social business per above.

The Grameen Bank Story. There is a whole section/long chapter dedicated to succinctly telling the story of the Grameen Bank. For those of you who who haven’t read Banker to Poor, this hits many of the story high points (and some later additional points) in much fewer words.

Grameen Companies. Yunus provides one of the first overviews (that I’ve seen) of the 24 (!) companies/entities that Grameen Bank has launched in the last 25 years. He describes what they are doing and identifies some as successful and others as work-in-progress. All of them are intended to help the poor in Bangladesh with just one, Grameen Trust, which is seeking to help the poor outside Bangladesh today.

The Grameen Danone Story. Yunus tells in detail the story of how the new Grameen Danone venture in Bangladesh transpired. [I wrote about it here a while ago and got it mostly right ;-)] This is Yunus’ posterchild example of a social business (except it does pay 1% dividends). It is a very compelling and interesting story of how Danone, the world’s largest yogurt company created a new JV with Grameen in Bangladesh to deliver nutritious food products to the poor of Bangladesh. Their first product is a tasty, healthy yogurt product aimed at children which is priced right and is run as a business. Grameen Bank borrowers provide the milk through the cows they have financed. Danone designed a new micro-yogurt factory that supplies a local area and is sold door-to-door by women entrepreneurs from Grameen Bank in their villages. This is a great example of a social business.

The Poor Lack Capital. Yunus has a strong belief that the first place to start with helping the poor is to provide capital. He argues that at the core of poverty is that the poor lack capital so “the poor work for the benefit of someone else who controls the capital.” He says that “poverty arises from the fact that they cannot retain the genuine results of their labor”, so “the poor work for the benefit of someone else who controls the capital.” Sounds like Marx, huh? Yunus is very much a democracy advocate and capitalist though and encourages a business (not socialist) approach to addressing poverty. In fact, he is quite negative about the ability of non-profits/NGOs and government to provide much help to the poor without the contribution of business.

Microcredit Interest Rates. Yunus has a very simple test for whether interest rates charged for microcredit are fair. He grades interest rates that are up to 10% above cost of funds as “green” (best), 10-15% above as “yellow” (warning) and >15% as “red” (he calls them “moneylenders”). He then has a few footnotes which admit that there should be some exceptions. While I agree that philosophically that there should be more transparency and accompanying scrutiny on interest rates charged by MFIs, his formula is very centric on Bangladesh and other like countries like India and are not reflective of the realities of the cost of doing business in most other emerging market countries. So, unfortunately, I think his test is more the exception than the rule.

International Capital for Microfinance. Curious to me, Yunus picks a fight and argues that international/foreign equity and debt capital for bad for MFIs. Some of this comes from his perspective that these investors have for-profit objectives (counter to his social business criteria) and some from the additional cost due to currency risk issues. He argues for national, subsidized megafunds to provide the capital to MFIs along with urging governments to authorize MFIs to collect and then re-lend savings (currently prohibited in most countries with Bangladesh being a notable exception.) I think his first point is too restrictive as there just isn’t enough subsidized capital to go around. I am fully in support of his second point on savings and think that this would be a huge benefit to the poor.

Technology for the Poor. Yunus is a big proponent of the power of technology to transform and uplift the poor. Grameen Bank has launched companies which have brought cell phones and internet services to villages across Bangladesh. And yes, the poor have very productive means of taking advantage of these services. He encourages the development of new technologies which are targeted at the poor. Probably his most interesting idea is a handheld device which provides simultaneous translation so the poor can more easily communicate with the globally important economic languages.

So, quite a bit to chew on from an economist from Bangladesh!
UPDATE: Here is Grameen Foundation’s blog on this book

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How to Change the World

December 2nd, 2007

How to Change the World: Social Entrepreneurs and the Power of New Ideas
by David Bornstein

Written in 2003 and updated in 2007, Bornstein’s book takes a look at the growing emergence of what he calls social entrepreneurs … entrepreneurs who are innovating in ways which bring significant new social/societal (and often economic) benefits. His book primarily uses examples from Ashoka, a key leader in identifying and supporting leading social entrepreneurs.

I enjoyed the case study format covering social entrepreneurs from many countries whom Bornstein personally interviewed over a multiple year period. Each of these people had an idea and the These include:

  • Fabio Rosa, a Brazilian who seeing many rural communities left behind without electricity, pressed for practical technologies and models which resulted in significant additional reach of electricity to rural farming communities.
  • Jeroo Billimoria, who grew up in a well-off Bombay family, founded Childline, a 24-hour helpline and emergency response line for children in distress (first in Bombay and then in many other Indian cities.)
  • J.B. Schramm, an American who founded College Access to enable poor (and mostly non-white) high-schoolers not on the college track to be better equipped and through the process of applying for going to college.

Ashoka’s model is to high-potential find social entrepreneurs in their “startup” stage and then support them through the Ashoka Fellows program providing a relatively small, personal stipend to enable them to further develop and implement their ideas . The book explains the Ashoka selection model where candidates are proposed and then there is a rigorous review process before someone is elected as a fellow. Critical factors in selection are the person having an idea that has the potential for large scale (national or international) social impact and the person’s lifetime dedication/commitment to figuring out how to actually implement it.

Here are a couple of interesting observation Bornstein made:

  • Ideas aren’t sufficient. There are lots of ideas that go nowhere. It requires a person to move from an idea through the complex process of implementation/realization.
  • “Most of the fellows I interviewed said that the credibility, confidence, contacts, and ideas they gained through Ashoka were more valuable than the money.” (p.243)
  • From Jean Monnet, the architect of European unification, in his Memoirs, that “people of ambition fell into two groups: those who wanted to ‘do something’ and those who wanted to ‘be someone’.” Effective social entrepreneurs fall into the former. (p.243)
  • “…social entrepreneurs are not selfless. If anything, they are self-more in the sense that they heed their instincts, follow their desires, and aggressively pursue their ambitions.” (p.287)
  • “…people who solve problems must somehow first arrive at the belief that they can solve problems. This belief does not emerge suddenly. The capacity to cause change grows in an individual over time as small-scale efforts lead gradually to larger ones.”

Overall, I really enjoyed this book and highly recommend it to people who are interested in learning more of the history/story of Ashoka and to see the positive change that social entrepreneurs are making despite their minimum coverage in the media.

Read my full review.

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The Poor Always Pay Back book review

November 17th, 2007

The Poor Always Pay Back: The Grameen II Story

by Asif Dowla and Dipal Barua

If anyone is interested in seeing inside one of the world’s most innovative microfinance organizations, this is a fantastic documentary of the huge transformation that Grameen Bank (founded by Muhammad Yunus) … 2006 Nobel Peace Prize winners … went through over the last few years to deliver “version 2″ of the Grameen approach to microfinance.

This book is written by practitioners for practitioners. So, there are lots of details, examples, explanations and market research data presented … including some which is not all that positive (e.g. that borrowers don’t uniformly increase sending their daughters to school). This book is a must read if you’re in the microfinance field and want to see how the next generation of microfinance is being rolled out.

The book starts off with a detailed review of the first generation of the Grameen methodology now called “Grameen I” or Grameen Classic. It explains the issues/challenges faced with the Grameen Bank using this model and how many of the learnings from their approach naturally drove them to adapt for an improved model. Then it describes the new Grameen II model in detail including the open-access savings, flexible loan products, a range of deposit products, self-reliance at the branch level, no need to access donor funds, their ability to keep interest rates very low, insurance products, pension products, education loans, elimination of group loan guarantees and more.

There is also a very good chapter on how Grameen Bank is intentionally starting to serve the poorest of the poor who are generally not serviced by microfinance because they are often surviving through begging. Grameen’s beggar’s program is built into the core of staff incentives to ensure that no one is being left out of access to financial services.

My only critique of the book is that it is a bit dry. You need to approach this more as a textbook and research document. I’m glad that the authors and others involved took the time to write this up to give us an indepth look at the Grameen story!

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China Shakes The World book review

October 13th, 2007

China Shakes The World: The Rise of A Hungry Nation

by James Kynge

I picked up this book to increase my understanding of how things work inside of the fast-growing economy and most populist country in the world. Kynge was the China Bureau Chief for the Financial Times from 1998 to 2005 providing him a very expansive viewpoint on the changes going on inside of China over a period of immense change in China.

Kynge looks at how entrepreneurs in China are leveraging access to liberal capital access from China’s banks to dramatically start and grow entire new business empires. One example he describes is how an entire out-of-date steel mill based in Dortmund, Germany [employing at its peak 10,000 workers] is purchased by a China entrepreneur, deconstructed by an imported team of Chinese works, transported to China and reassembled as an exact operating replica. This project was appropriately named Phoenix.

This book explores the issue that even with an economy growing at 9-10% per year, China generates a few million less than the need 24 million new jobs each year. Beijing politicians face incredible pressures to keep the economy growing in order to generate these new jobs in order to maintain peace and order. He says, “China is like an elephant riding a bicycle. If it slows down, it could fall off and then earth might quake.”

Some of the statistics Kynge presents about China’s economic boom:

  • 400 million people raised out of poverty
  • 120 million people migrated from farms to factories
  • Quantum leap in education standards for 10′s of millions of children
  • Construction of first world infrastructure on a massive scale
  • Growth of over 40 cities with populations exceeding 1 million people
  • Commercialization of housing
  • Vaulting progress up the technology ladder which has helped unleash one of the greatest ever surges in general prosperity
  • Lowered cost of goods leads to greater purchasing power of the poor in developed countries

He contrasts this with the dark sides of China’s boom:

  • Massive pollution which dramatically impacts their citizens’ health and beyond their borders
  • Poor working conditions in many factories with very limited ability for workers to organize
  • Growing inequality of the richest and the poorest
  • Massive demand for natural resources domestically and globally acquired at “any cost” without regard for human consequences
  • Widespread corruption
  • A failed healthcare system

Kynge covers many of the more recent tussles between China and developing countries on military objectives, offshoring, populists movements and more.

While this is not per se a book about defeating poverty, it is a good read for understanding some of the complex dynamics at play inside China … still home to 100′s of million people living on less than $2/day.

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