Cultural Barriers to Development

January 22, 2008 · Filed under Uncategorized

“Culture can contaminate you…If you’re not careful, it will contaminate you, and you will just talk, talk, talk without doing anything.” –Galai Diop

Most of Asia and Eastern Europe are plugging into the growing world economy, and are receiving all the benefits and problems that come along with it. But the ‘bottom billion’ of mostly African countries is stagnant or worse. Why?

Much is being made these days in academic economics of ‘poverty traps’, with Jeffrey Sachs of Columbia University leading the way. Families don’t have enough capital to invest in anything outside of subsistence activities, so they can’t escape poverty. Countries are landlocked without valuable natural resources and so it is too expensive for them to link up with the world economy. [1] Ok, fine. Agreed.

But as I look at Sachs’ diagrams of families trapped in poverty, replete with arrows and elements such as ‘lack of savings’ leading to ‘lack of investment’, I find it hard to believe that he is talking about human beings. People are complicated! We can be irrational, we can be greedy, we can cheat others, we can be lazy. The best way we’ve come up with to describe this conglomeration of tendencies within a group of people is in the word culture. I want to talk about the most daunting development trap of all- the culture trap.

Before I go into the details of the trap, you have to realize how powerful culture is and how diverse cultures across the world can be. Any social norm is up for grabs. Everything is subject to change. I glance at the Newsweek on my floor and see two male hands interlocked with a title concerning gay rights underneath. If I were to show this to a Senegalese friend, they would not get it; in Senegal, guys hold each others’ hands all the time and it has nothing to do with sexual attraction.

Culture is powerful. So many of our actions are heavily influenced (if not dictated) by our culture. In Senegal, I won’t ask a stranger for directions or other information without greeting him first. I don’t want to offend him. In America, I won’t ask a stranger for directions or other information unless I have to. I will excuse myself rather than making conversation about the heat. I don’t want to waste his time. I am the same person, but I act differently depending on where I am and who I’m interacting with. Culture dictates my behavior.

In this example, I have grazed the most important aspects of Senegalese culture: human interaction and community. The Senegalese are an extraverted people and depend on each other for everything from positive social interaction (what I like to call social grooming), to information, to resources. They depend on each other for food, they depend on each other for money, they depend on each other for survival. Whereas America’s survival strategy is rugged individuality, Senegal’s survival strategy is cohesive community. And they do incredibly well at surviving with what they have. Scientific studies have shown (read: in my arbitrary estimation) 20% of the population wouldn’t make it longer than 3 months if a town of Americans was transplanted here. Yet, the Senegalese in my town are doing alright. Despite being one of the poorer countries in the world, just about everyone (outside of the capital at least) has some rice to eat and a place to sleep. So the survival by community strategy works incredibly well at what it is designed to do.

Let’s look at how the community achieves its goal of survival for all despite limited resources. My favorite example is in The Ponds of Kalambayi when the author describes the agony of watching his work partner, after months of arduous labor, divvy up the hard-earned catch from his fish pond with everyone in his village until only a couple measly fish remain for him. We suddenly see how rational it was of all the other people the narrator had approached about fish ponds to blow him off without a second thought.[2] In a community-based survival setting, there’s no incentive to work any more than you have to. You don’t reap any of the benefits! And so this strategy goes from boon to barrier when the conversation changes from survival to development.

There are other aspects of the culture trap (don’t forget- this culture trap is self-evidently culture specific) that I see. When I see someone who works hard, I look at them with pride; when the Senegalese look at this person, they look at them with pity. Compare the American’s sometimes sadistic desire for challenge and the (not always, but often) Senegalese aversion to hard work, and guess which culture is better geared to advance materially. I don’t claim to understand the sociological reasons for these differences or that they will not change. But almost everyday, I’m reminded that: “When an American needs money, he works for it. When an African needs money, he talks for it.”[3]

[1] Sachs, Jeffrey. The End of Poverty : Economic Possibilities of Our Time. New York: The Penguin Press, 2005.

[2] Tidwell, Mike. The Ponds of Kalambayi. The Lyons Press, 1996.

[3] Maranz, David E. African Friends and Money Matters. SIL International, 2001.

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ebay gets micro

October 25, 2007 · Filed under Uncategorized · Tagged , , ,

ebay has launched its own version of Kiva, called MicroPlace, and they’ve dropped the charity bit–you actually can expect a decent return on your investment.  “Invest wisely.  End poverty.”  Believe it or don’t, but they’re registered broker-dealers now.  Microfinance just got big.

–James

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Microfinance Blows Goats…or, Does it?

October 25, 2007 · Filed under Uncategorized · Tagged ,

In response to Pete’s previous article, Mango-finance, I would like to rebut.  The wholesale dismissal of microfinance as an industry (“microfinance is not going to save the world”) is unacceptable.  Microfinance–though imperfect and only a piece of the solution–is necessary and revolutionary, and must be a component of any future solutions to the massive human plight issue.  Although I think Pete makes valid criticisms of microfinance as a standalone panacea, I think it is necessary to give credit where credit is due (I seriously resisted a pun there).

The components of microfinance that must be lauded are many, but here I focus on two salient points:

Microfinance breathes life into the concept of sustainability.  With and without grant money, microfinance lending houses have proven that they are viable self-sustaining entities.  More development initiatives must follow this sustainability model if they wish to have a long term impact without depending on foreign aid and private foundation handouts into perpetuity. 

Microfinance takes market-driven concepts and realigns the priorities so they achieve a valuable social end.  Microfinance is not charity; it is providing more people with access to financial services that are critical for the long term financial security of everyone, rich or poor.  Where would we be without mortgages?  Microfinance is simply an opportunity to take out a mortgage if you don’t have the collateral.

Microfinance is just one component of what should be a broader strategy: taking the lessons and tools of the “free market”, reconsidering the valuation structure, and adapting it to provide resource-poor communities with access to the means to lift themselves up.  Our priorities should be those which have the most significant marginal increase in standard of living. 

Unfortunately, the dollar (or renminbi, or rupee) is a terribly inaccurate measure of value.  Only when we incorporate more intangible costs and benefits (ie the triple bottom line) will we start to see the brothers and sisters of microfinance emerge.  Then the whole family of market-derived tools can have a more complete impact on communities–and will bring jobs, insurance, health care, education, security.  Microfinance can save the world, but it can’t do it alone.  We need to view microfinance as a harbinger of what’s to come, as the vanguard in a multi-faceted movement to realign our priorities to make the world more equitable, and to make the market more free. 

–James B

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Japan and the Third Way

October 14, 2007 · Filed under Uncategorized · Tagged , ,

In the Cold War, the world’s political independents were offered two models – the planned economic superstate of the USSR, and the free-market capitalism of the US. Socialism and capitalism are certainly still at odds, and while I think the readers of this blog would identify more with Milton Friedman than Karl Marx, there is no question that if we continue to let ‘the market’ have free reign, the tyranny will continue. So how do we tame the laissez fairy to be more considerate towards the reality on the ground in the majority of the world? Free trade will not help ‘raise the boats’ of those who can’t afford a waterproof dinghy, so perhaps there is a third way between the two mythical extremes exacerbated by the Cold War.

I recently read Blowback by Chalmers Johnson, a stunning and thorough examination of world history from WWII to 2000, which analyzes the real impact of the United States’ military and economic meddling around the globe in the second half of the last century. It’s required reading, for more than just Johnson’s incisive assessment of the global economic order as it stood pre-Bush, and gives me pause to think of how far we have really drifted.

Blowback, by Chalmers Johnson (2000)

But for the purposes of this article, I learned about the ‘Japanese miracle’ of post-war redevelopment, and was interested in Johnson’s presentation of Japan as a third way, which I will rebuild here.

A quick summary:

After WWII, the US did everything it could to ensure Japan’s political and economic stability as a way of ‘containing’ the Soviet Union and China, so that it would have a strong capitalist ally in East Asia. What no one realized until the 1990’s however, was that the system of capitalism that developed in Japan under the protection of the US was fundamentally quite different than Mr. Friedman’s pure free market ideal.

The Japanese model combined components of Soviet style economic planning with the entrepreneurial innovation and efficiencies of the American model. Here is a quick summary of the Japanese model.

· The Japanese government encouraged high domestic household savings by offering few safety nets, discouraging consumption through the high pricing of consumer goods, and offering no mortgages, or tax deductions for interest on house payments.

· Individuals’ savings, which were held in banks, post offices, and other government savings institutions were used as seed capital to fund the development of targeted industries, as chosen by the federal government. These industries were strategically chosen due to the potential for export growth to the US, so that Japan would obtain a greater share of the world market in those industries – initially clothes and cheap consumables, but eventually cars and electronics.

· Keiretsus, or conglomerates of cooperating firms and banks, exclusively held each others’ ownership interests in “elaborate cross-share-holding deals designed” to keep foreign corporate raiders out and to “keep the enterprise working for the country rather than for the profits of shareholders.” The sale of shares was not a way to raise capital, and the people who held them were uninterested in the risks or profits that the company’s operations entailed.

· Profitability was almost at the bottom of the priority list for bankers when considering an investment decision. “Instead, these bankers focus[ed] on enlarging productive capacity, achieving larger market shares, accumulating assets, and having large balance sheets.”

· Thus, “in East Asia, ostensibly private banks thus became partners in business enterprises and industrial groups, not independent creditors concerned first and foremost with the profitability of a company or the success of a loan. These banks in effect followed government orders and felt secure as long as they did so.”

· “Japan forced its citizens to save by providing no safety nets, encouraged labor harmony regardless of what it did to individual rights, and built industries based on the highest possible human input rather than simply on some naturally given comparative advantage. Their goal was to enrich Japan, if not necessarily the Japanese themselves. Theirs was an economy intended to serve the interests of producers over consumers.”

The positive aspects of this model are many, most importantly the equity of Japan’s economic growth during the Cold War. According to Oxfam, the East Asian economies achieved “the fastest reduction in poverty for the greatest number of people in history.” In addition, the system avoided the uncertainty and potential dramatic downswings of the speculative, roulette-style stock markets needed to raise capital for businesses. While Japan prevented labor volatility by offering some workers career job security, the US handled its labor issues through strikes and lobbying.

The most significant downsides to this model, and those that led to Japan’s severe recession in the 1990’s, is its dependence on export growth (mostly to the states) and its vulnerability to fluctuations in global capital markets. When the Yen deflated as a result of international monetary accords and capital flight in the 1997 Asian financial crisis, Japan’s model proved particularly vulnerable, and has yet to completely recover.

The point of this article is to consider the implications of a socioeconomic model based not on the primacy of the market and profitability for the individual shareholder, but designed to foster industrial growth to serve the interests of the nation as a whole. By adapting the prevailing corporate structure to minimize the importance of short term profitability for the shareholders, Japanese companies were able to insulate themselves from the volatility of the equity market and ensure their long term viability. By partnering with the federal government to ensure access to funding for capital expenditures and development costs, the keiretsu were able to diversify and pursue investments in industries and technologies that gave them significant control of the market.

This system, according to Johnson, is comparable to the current model embodied by the US Department of Defense and its partnership with the arms industry. The US Government provides access to federal funding for technology and manufacturing development, and then advocates for the sale of those arms to its strategic allies – the partnering of government and business to plan for and achieve a desired goal.

While selling guns to foreign nations is not my idea of a desired social end, it is not hard to envision a more fruitful relationship between businesses and the federal government where key industries are given precedence and their growth planned, stimulated, and protected. I can imagine these alliances for businesses in which wage growth was equitable, where the stewardship of healthy environmental-industrial practices was emphasized, and other strategic alliances that had as their primary consideration the well-being of the nation as a whole—and not just its superelite ruling class.

By redesigning our corporate structures so that the shareholders have less demands for short term dividends and year-on-year profitability, and by subsidizing capital access for businesses in concert with the government’s long term economic plans, there could be significant reductions to the gross inequalities of our primitive freemarket system. Because if you just let freedom reign, the capitalists become monopolists and the poor get poorer. Of course, this ideal is only possible in a world where our politicians are not already beholden to mountainous corporatocratic special interests, and where the long term interests of the people are actually in the interests of our government. So today, its for the birds. But tomorrow…

 

–James

 

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Mango-finance

October 6, 2007 · Filed under Uncategorized · Tagged

I recently came across a newsletter on the development happenings in West Africa (YEN-WA Development Newsletter). Of course, there’s the requisite article on microfinance, in this case KIVA. Now KIVA is great, rah, rah, rah. But to me, KIVA is more beneficial to the lenders than to the borrowers. This is the yuppie’s dream. Save the world without even shutting down your computer! Brilliant. And KIVA is doing good work. They have a revolutionary model for connecting do-gooders’ money and needy borrowers. But do-gooders’ money can be better spent. Lend your eyes as I explain why, and read about US African Development Foundation’s work (pp. 2-3).
For those keeping score at home, the microfinance made famous by Muhammad Yunus simply means small loans for business owners. Why are people in the developing world seeking this financing? Well, the story goes, they are small business owning entrepreneurs who want to expand their businesses. It sounds great. People all over the globe start their own businesses to support their families and they lift themselves out of poverty. Hoorah! Well…I don’t see it. Yes, microfinance can be an important tool for small business owners to grow their businesses under the right circumstances. But microfinance is not going to save the world.
The shortfall comes from a questionable assumption. Namely, that all these small business owners are entrepreneurs. Truth be told, most of them are in fact not true entrepreneurs and most of them never will be. Are the women that buy mangoes by the bushel and resell them by groups of five entrepreneurs? Do they have a unique vision, exceptional energy, and special stamina? Do they love buying and reselling mangoes? No, they could care less about the mangoes. But they’re poor as hell, and they can’t find any other way to make money, so one day they decide to follow their neighbor to the mango truck and launch their own small business.
The theory of microfinance says- give each of these mango ladies a few dollars and watch their businesses grow. And the success of this development strategy has been trumpeted from on high. Look at those nearly impeccable repayment rates! I remember a car insurance commercial from when I was growing up, where two people swooned like zombies, “Woow, look at those looow rates!”. What the commercial didn’t tell you was that those ‘loooow rates’ applied to almost no one, and all they bought you was terrible coverage. Judging microfinance by looking at repayment rates feels like the same thing; you’re not looking at the whole picture! High repayment rates are important for the banks financing the programs, but if a woman sells a sheep the day before her loan is due so that her group’s credit is clean, is she better off because of microfinance? (Cue Yoda voice) Things are not always as they seem, young Skywalker. (See Aneel Karnani’s article, Microfinance Misses its Mark)
Unfortunately for the mango ladies, the people in their town are only going to buy so many mangoes. The only way to sell more within a given market is to differentiate your product or lower the price, and throughout Senegal, the mango ladies have lowered the price, and lowered the price, and lowered the price until they make just a dollar or two a day. This leaves differentiation. Will more money shelled out individually help them to differentiate their mangoes?
No. Every local Senegalese mango market is saturated. People just won’t buy any more mangos than they already do. The only way to make money selling mangoes is to expand your market. Export. Mangoes in Europe and America go for 10x what they sell for in Senegal. Of course there are associated export costs and restrictions, but people are making money exporting mangoes. They could make even more money if they made mango juice, dried mangoes, or mango jam.
Why aren’t any of the mango ladies taking their microcredit loans and exporting dried mangoes? If you lived here, you might think this question a joke, but apparently do-gooders think microfinance can magic this into being. The women don’t need magic, they need expertise and scale that microfinance does not provide. The development investment community needs to adopt something closer to a venture capital model rather than a microfinance model. A savvy entrepreneur who wants to go into the mango business because (s)he knows mangoes, comprehends the opportunity exporting mangoes presents, and loves mangoes needs to build a medium to large scale business that can get the job done and make a profit doing it. This is the business that will create the most development per invested dollar. That’s what matters, not repayment rates.
Yes, you say, ‘development’ for the already wealthy business owner. This may be true to a certain extent, and strong measures must be taken to ensure that people are working under reasonable conditions. This is not a call for sweatshops. This is a call for jobs. Jobs that people can depend on. Jobs that provide a consistent paycheck. Jobs that I guarantee those mango ladies would be thrilled to take. Larger businesses would also create accounting, clerical, managerial jobs. In short, jobs that would help bridge the rift between the rich and the poor, a rift which has grown far too wide, and which microfinance is not doing enough to close.
The reason jobs are more effective in creating a middle class and alleviating poverty than financed ‘entrepreneurs’ is that poor, small business owners are entrepreneurs by force rather than by choice. An entrepreneur by choice is a rare, exceptional type of human being. How many of you would quit your job and become self-employed? All of you nodding your heads in your cubicle need to be realistic…Or quit your job today.
It’s really hard to run the show! Not many of us in the developed world are capable of being an entrepreneur. Most of us don’t even want to be. The trade-off of security, direction, and consistency for earning potential, freedom, and unique challenge is not one many are willing to make and stick with for the long haul.
The developing world is no different. Ask any ‘entrepreneurial’ mango lady why she started selling mangoes in the first place. Her answers will fall in the first half of the above trade-offs rather than in the second half upwards of 90% of the time. I find that even people in more sophisticated trades who talk like entrepreneurs have merely learned that that’s what development agents like me want to hear. They too would take a job the minute a formal business started hiring.
As long as people are forced by necessity (through lack of jobs) and enabled by subsidized microfinance to run their own businesses, the vast majority will not escape poverty. Resources (namely money, business expertise, and market connections) need to be directed to the true entrepreneurs. Those rare people with the vision, drive, stamina, and intelligence who can get results on a large scale. Only these true entrepreneurs will create decent jobs for the mango ladies, facilitating their ascent out of poverty and into better lives for their families and better futures for their children.

–Pete

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behold, the mighty blogosphere…

October 3, 2007 · Filed under Uncategorized

Here it is kids – humanomics.  Let’s try to keep the pretention to a minimum, go easy on the lofty rhetoric and keep our dialogue as grounded in reality as possible.  But that will be difficult for me, so the rest of you will have to keep me in line.  Any general questions can be handled through our group email address – humanomicsblog@gmail.com.

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