The Backlash Against Microfinance

Duncan Green of Oxfam International summarizes some of the most recent criticisms of the use of microfinance as a way to lift people out of poverty. He  takes note of some important new studies.

The backlash against microfinance

Posted using ShareThis

RicePaperSmall

The Soloist & Efficient Markets

The chaos in the L.A. streets was artistically depicted in the recent film about poverty in America: The Soloist.  It is the tale of an L.A. newspaper reporter that takes an interest in a homeless person that is a gifted musician. In the course of the film, the reporter – played by Robert Downey, Jr., takes an honest look at the issue of poverty in America through his friendship with the homeless man, played by Jamie Foxx.  BoyPovertyDirector Joe Wright tackles this issue with sensitivity and grit, while at the same time, avoiding the trap of either idealizing or demonizing those who have found themselves in this situation.  I bring this movie up not with the intent of reviewing the film, but rather as a pointer to a vehicle that viewers can use to become more aware of this pressing problem, not only in America, but around the world.

Rarely will you see an essay that merges the theme of an esoteric economic theory with a socio/political issue like poverty as depicted in a recent movie, but here you will see it.  This is because the two issues are intricately linked.

The July 18th-24th issue of The Economist had two good articles on how the entire discipline of economics is going through a major overhaul as a result of the 2008 financial meltdown.  Macroeconomics in particular has been largely discredited; in large part because the models are too simplistic and their usefulness for guiding public policy has been severely compromised.  The inability of the current models to predict the credit and liquidity conditions after the failure of Lehman Brothers has given pause to many people who were so convinced they were right.  Similarly, in the field of financial economics the much touted Efficient Markets Hypothesis (EMH) is now undergoing great scrutiny. Sophisticated methods of financial engineering emerged from EMH, many of which were implicated in the meltdown. So called institutional frictions led to certain inefficiencies that challenged the very basis of the model. These frictions that emerged in the form of toxic assets in the syndicated mortgage lending market were indeed inefficient.

Not only that, there was more than just the theoretical debris.  There has been a form of human debris that is represented by the increasing number of unemployed people and people living under conditions of poverty.  And, this is occurring not only in the U.S., but worldwide, with some countries hit harder than others.

It is within this context that the new conditions for thoughtful living takes place in the world. Certain economists, like Andrew Lo of the Massachusetts Institute of Technology (MIT) are developing models that reflect both behavioral and rational points of view. A behavioral approach is one that reflects the actions of irrational human beings, those that use herding behaviors, like those we have seen on Wall Street and on Main Street over the past few months. A rational approach is the straw man that has been used throughout the history of economics to characterize a value-seeking individual that acts in their own self-interest to maximize profits.  Andrew Lo’s work is premised on the idea that humans use trial and error as a basic decision-making tool.  It is within this context that institutional friction and societal learning takes place. This new “adaptive markets hypothesis” is one that takes into account the imperfections of the system; in the case of the world economy now, that includes the human debris.

The metaphor of a homeless musician playing Beethoven on the streets is an apt one for our time. He wrote his 9th Symphony at a time of great upheaval in the socioeconomic context of 18th century Europe. I wonder if the musicians of our time will be remembered by those living on the streets in the future. Don’t you think it would be better if we could build a society where everyone had a room to go to, like the Jamie Foxx character ends up doing in the movie?

Fair Trade Chat Tool

I have recently set up a Twitter account to link to some of the other people in the global community that are concerned about fair trade, growing trade protectionism, and back-tracking on the trade liberalization agenda.  Granted, this is a pretty esoteric subject…..but that is why Twitter is such a good tool.

Profile of mans face and hand with the word startThere are pockets of people all around the world that are beginning to see the linkages between rising unemployment, inflation, economic crises and political suppression.  The events over the past few days in Iran have begun to illustrate this point to the whole world.  Twitter has been the tool of the democratic-minded youth in Iran to communicate their views on suspected corruption in the election to the rest of the world.

Fair trade, as it is outlined by the 10 Principles of Fair Trade at the World Fair Trade Organization website ( see:  http://www.wfto.com/index.php?option=com_content&task=view&id=2&Itemid=14 ) is one of the only viable approaches to addressing the worldwide disparity between the haves and the have-nots of the world.

And, within the context of the fair trade agenda there is no superficial attempt to outwardly redistribute income.  It is a common sense approach to encouraging the extension of a free trade agenda in a manner that honors all participants in the supply chain.

Join in this important dialogue at this new chat room:

http://www.wfto.com/index.php?option=com_content&task=view&id=2&Itemid=14

Let us know what you think.  [Note:  This chat box was constructed using the chat functionality at http://www.meebo.com.  Here you can integrate all of your chat programs into a single platform.]

Also, be sure to check out some of the fairly traded products at:

http://www.worldofgood.com.

This is the essence of the New Silk Road.

Temple Restoration & Economic Development in Cambodia

On June 3, 2009 Robert Turnbull wrote an article for the International Herald Tribune entitled “Coaxing the Khmer temple from the jungle’s embrace” (pg. 10). The article focused on the restoration of Banteay Chhmar in NW Cambodia by a team led by British Architect, John Sanday.

BanteaShrey3

The site, once restored will likely be added to the UNESCO’s World Heritage List. It currently has a budget of US$6M and there are 44 employees working full time to restore the site.  Pictured here is a photo I took of the beautiful restoration that was done on the Banteay Srea temple of about the same historical period.

Interestingly, Turnbull also pointed out some of the other issues that are facing the team as they proceed with restoration. Key among these issues is the availability of water. They are operating in a region with many unexploded ordinance from previous war time activities.

These legacy land mines are dangerous to the local people for two reasons. First, many unsuspecting by passers are injured and maimed from the triggering of these old land mines.

AmputeeMusicians

Second, the weapons-grade materials are leaching out of the unexploded ordinance and into the local water supplies. As a result, the local people are plagued by both water quantity and water quality problems.

A hydrologist from Geneva, James Goodman, will be working with the team to map the area and to identify suitable spots for wells to be drilled. These wells will benefit both the restoration activities and the livelihood of the local population. Interestingly, a  Community Based Tourism group has been set up to support the development of a local infrastructure that is compatible with the life style of the local people while at the same time providing a framework for accommodating the increased traffic that is sure to come if the site attains listing on the UNESCO World Heritage List.

I have taken the time to sketch out the events and issues surrounding this temple restoration to point out some of the trade-related implications.

Cambodia is one of the poorest nations in Asia.  Despite recent progress, the Cambodian economy continues to suffer from the effects of decades of war, civil war and internal political strife. The Cambodian economy is still essentially aid-dependent. Investment in infrastructure and social services is predominantly funded by overseas development aid and concessionary loans. Per capita income is rapidly increasing but is low compared with other countries in the region. According the U.S. Department of Agriculture Foreign Agricultural Service, per capita GDP was US$357/year in 2004.

Nonetheless, by 2008 the rate of growth was 9.4% in 2008 as noted by Cambodian Prime Minister Hun Sen in his February, 2009 speech to the Economic Conference of the Economist Group and as reported by the Xinhua News Agency (February, 2009).  They are seeking to maintain a rate of at least 6% in 2009 given the current global financial crisis.  This optimism is based on the relative importance of their three most important industries:  agriculture, textiles, and tourism.

JaneWithChildrenHowever, more than 50% of the population is 20 years or younger. The population lacks education and productive skills, particularly in the poverty-ridden countryside, which suffers from an almost total lack of basic infrastructure. Fully 75% of the population remains engaged in subsistence farming.  Agricultural production for the export markets (a source of hard currency) is just beginning to develop.  And, the country’s textile industry has been affected by the end of the Multi-Fiber Agreement in 2005 which had governed a global quota system for decades.

Nonetheless, efforts are being made, with the support of the World Bank and the Asian Development Bank among others, to develop training programs for employment in each of these sectors.

It is against this backdrop that the Community Based Tourism group associated with the Chhmar restoration is taking place.  It is my hope that the regional issues associated with water availability be resolved.  Further, it is my hope that some training programs be implemented.  A tourist economy can be a double-edged sword.  The demands for young men and women in the sex trade are high in Cambodia.  And, when this is the only option for feeding the extended family, even this can become acceptable in this societal context.

SreyGirlsSmallAgriculture, especially silk worm farming, presents a viable alternative to a Cambodian economy based strictly on the tourist industry.  Silk worm farming relies heavily on the cultivation of mulberry; the leaves of which are the preferred food source for these rapidly growing worms.  And, due to Cambodia’s latitude, rainfall patterns, and climate, mulberry farming is a suitable crop.

It is my hope that some of the contributions being made by the private donors to restore the beauty to the Banteay Chhmar temple be budgeted for just such programs for the local population.

Free Trade Agenda in 2009

ContShipLoad

The export of the globalization psychology with its promise to improve the living standards of millions of people in the developing world during the 1990s and 2000s was a precursor to the global crisis we are experiencing now, in 2009. 

 Globalization psychology can be defined as an approach to global market integration that uses free trade and regulatory harmonization as a basis and is coupled with financial sector deregulation across national boundaries.  It encompasses both the globalization of sources of supply with cross-boundary supply chains and the globalization of consumer markets.  

Although the positive effects of free trade have been demonstrated, there have also been some unintended consequences.  High worldwide inflation, off-the-charts prices for oil, and food shortages and riots in many developing countries are just a few of the maladies affecting modern global society.  Security from threats stemming from political unrest and illegal migration are themes that are dominating most developed country public policy agendas.  At the same time, the real effects of global warming are being felt across the planet through increased tornado activity, more frequent and more powerful cyclones and hurricanes, floods, and erratic weather patterns. The extent to which human activity contributes to global climate change is still under debate; but it cannot be contested that the rapid globalization of the 1990s/2000s led to greater and greater levels of petroleum product and natural resource use.  This has exacerbated the already fragile balance between the human socio/political systems and the environmental and energy systems. 

The convergence of disruptions in these social/political and environmental systems has been called by Thomas Friedman the beginning of the “Great Disruption” in a March 8, 2009 New York Times editorial.

It is evident that we are moving towards a period of greater conflict between the ‘haves’ and the ‘have-nots’ of the world.  Globally, it has been shown that, despite all the promising rhetoric of the globalization advocates, and despite the actual, verifiable improvements in the living standards of millions, there has been a negative change in income distribution across the world population since the onset of globalization. Here are some startling facts from the 2007 Human Development Report of the United Nations:

             

AbandonedWife&Daughter

 

               

  • About 0.13% of the world’s population controlled 25% of the world’s resources in 2004
  • About 20% of the world’s population consumes 86% of the world’s goods while 80% of humanity consumes the remaining 14%.
  • About 50% of the population of the world lives on less than $2 a day as measured by purchasing power parity (PPP). 

Indeed, as some have claimed, the unregulated, free-wheeling nature of global companies operating in the 1990s/2000s has contributed to what can be called the AIG-effect.  That is where the norms and expectations of financial reward by top management appear to have no basis in reality or any cognizance of the impact of their actions on their subordinates or broader populace around them. If we extend this analogy to the global context we can say that the top 20% of the world population that consumes 86% of the world’s resources has little understanding of the impact of their actions on the other people around the world. 

This is not to say that globalization is not a noble and laudable goal; indeed it is through this world-wide business/technology and economic transformation that the most important improvements to the quality of life and health and welfare have been made.  What is globalization anyway but improved transportation and communications networks and reduced restrictions of the flow of capital and goods?  And, it works for spreading the wealth of nations, as was so eloquently pointed out by Martin Wolf in his 2005 book Why Globalization Works. Wolf argues that a market economy is the only arrangement capable of generating “sustained increases in prosperity, providing the underpinnings of stable liberal democracies, and giving individual human beings the opportunity to seek what they desire in life.”  Furthermore, he concludes that individual nations should remain the locus of political debate and legitimacy and those multilateral institutions, like the World Trade Organization (WTO), should draw their authority from the consensus of the nation-states. 

But, even so, when the technological advances that led us to globalization are coupled with the growth rates in many developing countries, and the effects of the increased demand for petrochemical products are factored in, it becomes obvious to thinking people that there are now many unintended consequences of this global movement. Jonathon Porritt argues very effectively in his 2007 book Capitalism as if the World Matters that this is due to our failure to see that the human, social and economic systems that have led to the massive technology and wealth transfer known as globalization are simply subsystems of a larger thermodynamic earth system that has limits to growth.  And, the unintended consequences of these human derived subsystems seem to be catching up with us at about the same time as the physical processes that regulate our planet’s weather patterns.  He points out that a Five Capitals Framework that accounts for natural, human, social, manufacturing and financial factors should form the basis of our path forward. 

With this, there is hope.  That is, if our governments have the wherewithal to expand beyond the current rhetoric and status quo conditions to incorporate this broader vision. And, with conscious action on the part of the voters, citizens and consumers of the world, we may achieve it.  There are economic possibilities that can help to ameliorate some of the suffering that is increasing at an accelerating rate.  These economic possibilities are beautifully set forth by Jeffrey Sachs in his 2005 book The End of Poverty: Economic Possibilities for Our Time.  In this book Sachs lays out guidelines for ending global poverty and sees this as the great opportunity of our time to advance the Enlightenment objectives of democracy, global security, and the advance of science.  And, in addition to the individual and collective actions advocated by Sachs to improve the living conditions of millions of people around the world, there are public policy changes that can be implemented to further accelerate the effects.   

These changes are best pointed out by Joseph Stiglitz in his 2006 book Making Globalization Work.  Importantly, Stiglitz argues that the key to successful global trade liberalization lies in the approaches that multilateral institutions and individual countries take to ground trade in principles of fairness.  This point underscores my underlying premise that is based on international trade as the engine that is fueling globalization and with it, the increases in human welfare we have witnessed over the past few decades. But a second part of my premise lies in the simple fact that the economics of globalization must be grounded in the physical and thermodynamic truth of the limits to growth.   

The above cited arguments of the reform globalization advocates, no matter how sound, were, nonetheless, made prior to the onset of the rapid rise in crude oil prices, the failure of the world credit and banking systems, and the global plunge in the stock markets that have so shocked today’s world economy.  In fact, to some extent, they predicted this outcome.  

Now, that the world is undergoing this transformation, it is of such significance that the entire fabric of modern human society is threatened.  The delusion of unlimited growth is being questioned by millions of developed world citizens and consumers as they scramble to pay their mortgages, put gas in their cars, and, at the same time, keep food on their tables. In the emerging markets and developing countries, it is much more dire as the populations of internally displaced persons, emigrants and immigrants continue to grow from natural disasters, resource shortages, and political upheaval.

The capitalist consumer is either being transformed into a desperate survivor or a responsible citizen through the day-to-day struggles of this rapid economic transformation. This situation is, indeed, the natural outcome of the depletion of global oil reserves and was forecast as early as 1956 by geophysicist M. King Hubbert and presented so forcefully by Paul Roberts in his 2004 book End of Oil. Our societal failure has been our inability to mobilize the political will and resources needed to adequately plan for this natural outcome through energy diversification.  

It is the actions of the responsible citizens of the world that will help us avoid such collective delusions in the future.  But, as Mort Rosenblum argues in his 2007 book Escaping Plato’s Cave, it is in part, America’s blindness to the conditions in the rest of the world that is threatening our very survival.  America’s citizens happen to make up a good part of that 20% consuming 86% of the world’s resources.  His solution for Americans is to quit gazing at the shadows on the wall and turn around to cast our eyes on the reality of the moment.  If we can do this, there is hope.

But, with the world in desperate straits, it seems unlikely that the U.S. should be launching new initiatives like some of the programs in the ‘stimulus’ package recently passed by the U.S. Congress and signed into law by President Obama.  Indeed many European countries are refraining from using deficit spending as a tool for stimulating their own economies and they are questioning the wisdom of our approach to doing this.

Furthermore, with so many Americans out of work, there is little support for programs that are aimed at shifting resources from the developed world to the emerging markets.  On the contrary, a strong protectionist mentality has, in some circles, taken hold of the American psyche and threatens to take us back to an 18th century mercantilist mentality.  This tendency must be strongly countered by the rational arguments for free and fair trade and continued trade liberalization. 

It is our leadership in advancing free trade that, in the past, led the U.S. to become the leader of the free world.  It is our approach to establishing free markets which has, in turn, improved the welfare of millions of people around the world.  And, at the end of the day, within the current geopolitical context, it could help us to counteract this short-sighted, protectionist reactionism.  Herein lays the key to our path forward. 

What I am alluding to when I refer to the ‘hope’ of our time is this:  We have the opportunity to take an entirely different approach to our economic and trade agenda.  Let us recognize that our underlying assumptions of unlimited growth were not comprehensive enough to take into account the thermodynamic and limits to growth realities of our natural systems.  Let us recognize that free trade as defined by classical microeconomic theory (i.e., based on perfect markets, perfect information, unlimited resources, mobility of labor, etc.) does not exist in this idealized form.  Therefore, it is unwise for us to base our public policy on a theoretical framework that is elegant, but not reflective of reality.  Let us recognize that we need to substitute this outmoded model with an updated, more workable framework.  But in this recognition, it is important that we refrain from casting back to a time when mercantilism was the norm and trade protectionism was the battle cry. 

The guiding vision that should instruct our national commercial public policies in this day and age should be based on a more integrated model that reflects all of the Five Capitals outlined in Jonathan Porritt’s framework. To reiterate, these are:

  1. Natural Capital
  2. Human Capital
  3. Social Capital
  4. Manufacturing Capital
  5. Financial Capital

With this kind of a guidepost, our actions can once again help us to lead the free world toward positive outcomes, and a free trade agenda that truly works.  That is:  a free trade agenda that reflects the needs of our time, a free trade agenda that is fair, and a free trade agenda that recognizes the natural limits to growth.