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Borrowing Small, Aiming Big: Microlending’s Big Promise

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According to a report by the U.N. Food and Agriculture Organization, approximately 842 million people worldwide are malnourished, while the number of chronically hungry people is increasing at a rate of nearly 5 million a year.

Traditional approaches to solving poverty and hunger, including providing financial aid to governments in poor countries, have proven to be remarkably ineffective. Part of the reason why these strategies have failed is because the aid effort has never been adequate and has nearly always come burdened with specific demands for economic ‘reform’. Other reasons include the fact that the aid effort has never been followed closely by reduction in agricultural subsidies to allow for sustainable prices of Africa’s agricultural produce, or that developed countries have never implemented any sort of comprehensive banking reform that will inhibit the growth of the bank accounts of Africa’s corrupt leaders.

Then there is also the simple fact that the task of tackling poverty is enormously challenging given the variety of social, economic, and political problems like corruption, environmental degradation, crippling debt, gender, and racial inequalities etc. that dog poor nations. While all of the above reasons ring true, the larger problem with the aid effort is the fact that it focuses on a “top-down” approach to problem solving, an approach that is not appropriate for corrupt governments or countries with high levels of violence or significant political cleavages.

Corruption and other inefficiencies in aid distribution have gotten a lot of attention recently from policy wonks. The Bush administration came up with the idea of a ‘Millenium Challenge Account’ that would dole out money based on how a poor country performed on a variety of indicators like corruption etc. The idea indeed was wonderful. The magic bullet was supposed to give countries an incentive to reform so as to become eligible for money.

Except the plan didn’t work. Most of the money remains unspent tucked in some bank account. Some would argue that that’s a wonderful result – at least the U.S. saved some money, and the money didn’t end up enriching the Robert Mugabe enterprise or similar morons. The plan failed because it was based on the delusional policy that gave incentive to governments that were the most corrupt and otherwise the least likely to reform. Even aside from that, the fact remains that corruption is strongly correlated to poverty. So to solve one – poverty – by basing aid on corruption levels is a failed enterprise for nearly all poor countries have catastrophic levels of corruption.

The reason why the Millennium Challenge Account failed is indicative of the wider malaise afflicting top-down approaches. We need to radically rethink how to “do aid”. If success of micro-credit arm of Bangladeshi firm Grameen is anything to go by, the answer is in ramping up money available for micro-credit schemes.

Lack of access to low interest credit is stifling growth rates in many villages and keeping rural populations under high debt burden and often contributing to ‘famines’. (Generally markets are full but people are unable to afford the food.) Often times there are no banks in rural areas, and their job is done by moneylenders who often charge exorbitant interest rates on egregiously limiting terms from the largely illiterate population. More money should be earmarked for micro-credit so that people can start a business or pay off their debt without having to pay back a principal balance with a high interest rate attached to it. More international aid should be allocated to accommodate people who need small loans at low interest rates.

Another similar micro-credit strategy includes providing farmers with farm animals or seeds at a nominal interest rate. This approach currently led by Heifer has been fairly successful.

While problems with infrastructure will create bottlenecks as economies start to grow, the approach defined above is a great medium-term strategy to alleviate poverty.

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  • RedTard

    Better yet, we should ditch aid completely and let people learn to provide for themselves.

  • http://victorplenty.blogspot.com Victor Plenty

    Microlending does exactly that. It lets people learn to provide for themselves, because every loan made through Grameen Bank and similar institutions is expected to be paid back.

  • http://victorplenty.blogspot.com Victor Plenty

    Successful, independent businesses grow as a result of microlending, rather than the entrenched state of dependent helplessness resulting from many other forms of “aid” to the poor.

  • http://alienboysworld.blogspot.com Christopher Rose

    For what it may be worth, I am in the process of starting up a new business that will
    1) Make people’s dreams come true
    2) Be a lot of fun
    3) Give a lot of money to micro-cr*dit projects (the “c” word is on the BC stop list!)
    4) Possibly get me out of debt.

    I used to do some work on behalf of the Commonwealth back in the late 90s and became aware of and fascinated by the Grameen initiatives to help the world’s poorest people improve their own lives through micro-lending.

    There is now also an American sister foundation called the Grameen Foundation USA which is also worth supporting…

  • http://victorplenty.blogspot.com Victor Plenty

    Sounds great, Christopher. May you enjoy complete success in your new business and all four of those goals.

    I’d ask whether you needed any business partners in the Pacific Northwest of the United States, if I weren’t already deeply involved in trying to build up a small business.

    I am curious to know more about what exactly you’ll be doing. Perhaps you could post an article about it here, if the details aren’t still trade secrets of some kind.

  • http://alienboysworld.blogspot.com Christopher Rose

    Thank you for your kind words of encouragement Victor. I believe that my plan has universal appeal and can be done literally anywhere.

    I think it can be sold or licenced to third parties to raise even more money for Grameenesque type projects.

    Because of that I’m trying to protect the idea itself as well as my own intended use of it so it’s at that fairly boring but necessary stage of legal review.

    Perhaps I could try to write something about it when things are a bit more concrete.

  • ss

    Thanks for the post, Gaurav.

  • Baronius

    I’ve been hearing good things about Grameen Bank for years. I can’t think of any other development program that’s been so universally praised. Why isn’t something similar being pursued in Africa? Or is it?

  • http://victorplenty.blogspot.com Victor Plenty

    I’ve heard Grameen Bank is making efforts to expand into Africa, but haven’t heard any recent reports on how successful those efforts have been.

  • Patricia Dotzler

    Check out Village Hope Core to see what VHI is doing for remote Kenyan villagers. A friend and I just sponsored the loans and training for a “merry-go-round” group of 12. I’m now looking for funding from corporations or companies to expand the support for self-sustainability for these beautiful Africans, to restore their dignity and self-respect, provide protein in their children’s diets, a heater in their hut, and education.

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