Microfinance Horizon

By Glen Pierce

7 November 2010 [Tumblog]

In 2006 I became aware of extreme poverty and began studying its impact, causes and solutions since then.  As a financial professional, my perspective has been most influenced by Jeffrey Sachs and Muhammad Yunus.  These two leaders focus on two different solutions to the crisis: direct aid and microfinance.

Today, I would like to put forth my ideas on how those tools, combined with government policies, can best improve the lives of the 1.7 billion people living in poverty today.

Microfinance focuses on market-based solutions to poverty alleviation by providing capital, often at below market rates, to the poor.  Direct aid programs also hope to bring communities into the global village, but generally do not require the repayment of principal or interest on their investments.  With access to funding, poor families can begin to move up the economic ladder by creating small businesses that hopefully grow and allow people to pull their families out of the trap of extreme poverty.  Many of these programs involve the creation of fair trade cooperatives and often involve the production of commodities such as coffee.  The cooperatives have access to global markets and the international trade that then transpires is generally considered a step towards economic independence.  These are excellent programs and deserve more funding.

The significant point of failure of these programs that should be addressed in the near future is this: Access to global markets inherently introduces destabilizing forces into communities, both financial and non-financial.

Financial Destabilizing Forces

While all communities are already subject to destabilizing forces such as droughts, the risks associated with globalization should be mitigated within these communities as best as possible.  For the communities involved in commodity production, they are subject to highly volatile price fluctuations, sometimes as much as 50% in a single year.  For example, between 2000 and 2004, coffee prices fell from $1.20 per pound to as low as $0.45 per pound.  While fair trade efforts can improve price stabilization, only 2% of global coffee sales are fair trade and it is the most established market in the fair trade system.  Unfortunately, as the program grows, it’s impact will become less effective at income stabilization as the market will adjust to the new supply-side changes.

Non-financial Destabilizing Forces

Again, while destabilizing forces are almost certainly present initially, newly introduced forces should not be ignored.  Two areas of specific concern are nutrition and environmental impact.  Nutrition has been dubbed “the forgotten Millennium Development Goal.”  With communities focusing their agricultural efforts on commodities, food security becomes dependent upon monocultures and supply chains.  From an environmental perspective, in Rio, Brazil, 2.4 billion plastic bags are distributed annually.  Communities in South America, Africa and elsewhere are struggling to control the rapid growth in garbage resulting from the influx of outside packaged goods.

While we are trying to build communities that are economically independent, microfinance programs have the potential to create communities that are interdependent but also competitive with each other.

The solutions to these problems are simple, but counter-intuitive to the paradigms of the economic models from which these programs were developed, notably, that specialization and trade are the keys to economic success.  To be clear: the ultimate objective of giving the poor the tools necessary to build sustainable economies remains, however, the nature of the transition to those economies must be considered.  South-East Asia is developing in a world much different from that in which the United States achieved its economic independence.  Communities must be able to provide for their own needs while reaching out to the global village for enhancements to growth.

Education

The education system must be approached from a more holistic approach.  While literacy and computer skills are important, many communities lack even more basic skills necessary to build their economy’s first flagstones such as building trades and agriculture.  Housing and food production are critical economic inputs and local production is vital to a developing economy.  There are techniques for building safe, comfortable structures from indigenous materials in most, if not all, habitable climates across the globe.  Shanty towns are partially a product of the lack of community planning and building skills among local inhabitants.  These skills need to be taught in schools just as much as literacy in developing communities.

Economic Independence

Farming techniques such as intercropping, irrigation techniques and erosion control can substantially raise yields.  Using indigenous crops and livestock rather than imported varieties can reduce losses due to droughts and pests.  Agricultural production should focus on serving local needs first to act as a buffer against supply disruptions due to supply chain interruptions and price swings.  Giving people the skills needed to produce their own food is the first step towards a more stable economic future under all conditions.  While chemical fertilizers offer significant improvements to farm production, the environmental impact as well as the lack of access to these products makes dependence upon them unsustainable.  There exist alternatives to chemical fertilizers that communities can produce locally given the proper tools.

Family Planning

Many development programs now discuss the indirect impact that they have on women’s health and status in societies, often highlighting family planning as a significant improvement in women’s lives.  While family planning is generally thought to be a natural byproduct of development, its importance is so great that it should be a serious consideration for several reasons.  Various studies have demonstrated significant economic benefits to family planning such as increased maternal health and increased resources available on a per child basis.