LIDS Symposium Blog Series – Businesses that Alleviate Poverty

By: Peter Vincze

During Panel 1 of the LIDS 2017 Symposium, Kevin Saunders, Lizzie Merrill, and Eric Solomonson shared their insights on diverse initiatives and approaches of four companies with the common objective of alleviating poverty. Accion International is a non-profit organization that aids microfinance institutions rendering financial services to low-income clients all across the globe. Ignitia and SeKAF are two Ghana-based NGOs that produce hyper-local, high-precision tropical weather forecasts and shea-based products through environmentally friendly and socially inclusive methods, respectively. One Acre Fund offers asset-based loans and agricultural trainings to eradicate poverty through the support of small-scale farmers in East Africa.

One of the most memorable points of the hour-long discussion that Kevin Saunders raised and Lizzie Merrill and Eric Solomonson echoed elaborated on the triple challenge (capital, channels, and data) lending institutions face in the international development arena.

The capital challenge stems from the fact that the level of demand for capital influx at the community level hardly ever equals the niveau of capital supply provided by lending institutions. The shortage of supply chiefly attributes to the fact that aid agencies themselves often struggle with obtaining and maintaining a constant influx of capital to their reservoirs that can later be allocated to their clients. Steady investment and working capital are however indispensable, especially for microenterprises and SMEs, to establish and/or expand their business activities, leading to a gargantuan demand for capital. As the traditional way to satiate this need through the philanthropic community is no longer satisfactory on its own, alternative, concerted ways need to be sought to ascertain proper funding for lending institutions.

The challenge of channels refers to difficulties of aid agencies in reaching individuals and businesses in developing economies that strive for access to financial services. Financial services are unavailable in many rural and even urban areas and, even if they are present, associated costs hinder accessibility. Main obstacles for lending institutions in these contexts are enhanced transaction costs, paucity of traditional collateral and basic requirements for financing, as well as geographic vicinity. Dearth of access to financial resources is a key impediment for entrepreneurs who possess the ability and required skills, as they cannot translate their deftness into sustainable outcomes. They are prone to resort to non-formal financing like moneylenders (“loan sharks”), traders, or even relatives and friends, and other high-risk financing mechanisms that further inhibit the operation of aid agencies. Cell phones and other technological developments can eventually mitigate challenges; access to these technologies is however also scarce, leading to a vicious cycle.

Accurate and comprehensive data is the sine qua non to evidence-based, responsible decision-making. Access to veracious and actionable data is particularly challenging in the development arena where data collection and reporting face numerous obstacles and can easily be hijacked for economic and political gambits. Among the numerous factors that impede or constrain data collection In developing contexts are low propensity of respondents, low standards in bookkeeping, deficiencies in law and order, rapid institutional alterations, size of informal sectors, and cultural constraints. Even in the unlikely scenario that data is reported accurately and fully, access to statistics, especially for non-public entities, be it large or small in size, is laborious and costly if not impossible. Asymmetrical and/or incomplete information poses risks, as institutions are unable to make optimal decisions vis-à-vis credit, inventories, clients, etc.  Technology, through the collection of mobile and satellite data, again has the potential to yield a breakthrough; however, dearth of access to such, in this context as well, perpetuates the issue.

While smaller donor agencies are more prone to the above-mentioned challenges, no lending institution is exempt from them, regardless of size or prevalence. My personal experience draws me to the World Bank, which constantly seeks solutions for all three issues.[1] The Bank’s coquetry with blockchain technology is one emerging approach to find remedies to the channels challenge. The recently launched Development Data Hub with provision of easily accessible and accurate development statistics aims to mitigate data challenge. The Bank also endeavors to tackle the challenge of capital, which, I would aver, is the most alarming in the current development policy landscape, with alternative ways of financing. Let me elaborate.

Funding of the World Bank (IBRD and IDA) relies on direct contributions of member countries.  Every member state renders a certain amount of initial capital to the institution upon accession that can later be expanded. Voting power of member states depends on the amount of contribution the country has made. Share allocation as well as voting power differs in IBRD and IDA.

In addition to bond issuance on international capital markets, IBRD relies on contributions from its 189 member states. IBRD’s capital stock has to be intermittently expanded through capital increases to replenish accounts drained by accelerated disbursements and/or to expand operations. A roadmap for the most recent general capital increase was assented to during the 2015 Annual Meetings in Lima with a decision to be made during the 2017 Annual Meetings. Owing to the change of the U.S. political landscape, the kismet of the general capital increase is however currently uncertain. During the 2017 Annual Meetings, U.S. Treasury Secretary Steven Mnuchin, representing the largest shareholder of the World Bank, rejected the idea. Instead, he urged the institution to transform its operations to effectively reallocate its existing capital and gestate a framework that would allow a financially self-sustaining Bank.

IDA capital replenishment occurs triennially. Within the framework of the past IDA replenishment, IDA 18, member states have made the most ambitious set of commitments to date with a historic $75 billion replenishment package that transforms IDA’s financial model.  Despite the unprecedented pledge, IDA’s future is currently irresolute, as the Trump Administration is rolling back several Obama-era commitments. In an effort to secure IDA finances, the institution has commenced penetrating capital markets through bond issuance for the first time in its history despite lingering criticism.

The future seems to be brighter though than one would think. Even if traditional financing sources are reconsidered, new emerging international development actors seem to be willing and able to step in to finance lending institutions as well as development projects directly. China, India, Russia, South Africa, Turkey, the Arab donors inter alia have for years been enhancing their efforts to fill potentials vacuums through unilateral, bilateral, and multilateral initiatives.  China, for instance, has recently increased its contribution to the Bank from 2.77 percent to 4.42 percent to become its third largest shareholder. In addition to state actors, the burgeoning of a heterogeneous smorgasbord of non-state actors can also be witnessed in international development circles ranging from philanthropic foundations (e.g. Bill & Melinda Gates Foundation), to global funds (e.g. The Global Fund to Fight AIDS, Tuberculosis, and Malaria) and enterprises engaging in corporate social responsibility.  These private actors not only bring a new set of perspectives to the table, but may also be financial heavyweights in particular sectors or regions. In this context, the work of organizations such as Accion International, Ignitia, SeKAF, and One Acre Fund is more salient than ever. Not only do they work to persuade the commercial world to penetrate the development arena, but also they seek to foster social inclusion, impact investing, the provision of management services and technical assistance, inter alia that will all assuage the triple challenge of capital, channels, and data.

[1] The term ‘World Bank’ refers to the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).  The World Bank Group comprises of five institutions:  International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of Investment Disputes (ICSID).  This analysis merely focuses on the World Bank.

About the blogger: Peter Vincze is a consultant on corporate governance-related topics at the World Bank. He aims to pursue further academic training in international development law.

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LIDS Symposium Blog Series – Faizal Karmali on Networked Approaches to Complex Global Problems

By: Seth Norris

Mr. Faizal Karmali (Associate Director, Network Engagement & Bellagio Programs, Rockefeller Center) gave the closing address at the LIDS 2017 Symposium. His speech highlighted the increasing importance of working across discrete global networks to effectively implement international development projects. Specifically, Mr. Karmali looked at the relative influence of individuals, government, civil society, and the private sector across the networks of capital, expertise and influence.

Mr. Karmali began his talk by noting that government and civil society are by far the largest sources of capital investment for international development projects. However, the contributions of these two groups is by no means equal, with the total giving of the top 50 NGOs still falling 6 billion dollars short of the budget cuts to USAID proposed by the Trump White House.

Next came a discussion of international networks dedicated to providing expertise for development projects, with government and civil society being cast as the predominate providers, given that funds directed to private sector consulting firms through USAID are still merely extensions of government backed development finance.

Finally, Mr. Karmali touched on influence networks, arguing that the government and private sectors have traditionally held the most sway. This influence can have both positive and negative elements, as Mr. Karmali highlighted by recounting the effect that US subsidies of ethanol production have had in increasing global food prices, partially contributing to the outbreak of events like the Arab Spring uprising in 2010.

Mr. Karmali concluded by highlighting several NGOs who have succeeded in working across networks to effectively implement international development projects, including  BRAC, the world’s largest NGO, and the Aga Khan Development Network, which currently has operations in over 30 countries.  By pursuing both non-profit and for-profit endeavors, these NGOs have been able to dramatically increase the effectiveness of their development projects by pooling resources across the networks of capital, expertise and influence. Mr. Karmali ended his remarks by encouraging those in attendance, whether they aspired to work in international development or not, to consider what they might do to further international development goals around the globe.

About the blogger: Seth Norris is a member of the JD Class of 2019 at Harvard Law School. Before coming to Harvard, Seth earned his B.A. in East Languages and Literature from Yale University.

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LIDS Symposium Blog Series – Development Beyond Aid: Mark Weber speaks about the foundations of human flourishing

By: Mike Maruca

Mark Weber, a fellow at the MIT Legatum Center for Development and Entrepreneurship and co-producer of the powerful documentary Poverty, Inc., opened the LIDS 2017 Symposium with a series of stories about the foundations of human flourishing. He encouraged the attendees to think algorithmically about development: to use an approach (1) based on principles derived from what is good for human ecosystems; and (2) that self-consciously identifies contradictions and hypocrisies in the international development system, in order to weed them out.

Mark opened with a story of Muhammed Al Bouazizi, the Tunisian fruit seller whose tragic death marked the start of the Arab Spring. Muhammed, who was operating extra-legally in the informal economy, had his fruit cart confiscated by a police officer and was banned from ever selling again. Muhammad had no legal remedy and his livelihood had been taken. His pure desperation led him to stand in the middle of the street and light himself on fire. It turns out many of those who self-immolated in the Arab Spring were micro-entrepreneurs; Muhammed’s brother explained a cause of the anger: “Even the poor should have the right to buy and sell.”

In Western media, the narrative of the Arab Spring tended to focus on corrupt dictators, not the right to access markets. But it was the lack of access to the basic institutions that caused Muhammed’s desperation; Muhammed was arbitrarily deprived of the freedom to create something of value in the world. And even if Muhammed had received microfinance or had the support of a trendy poverty-reduction-through-entrepreneurship organization, he would have always been one corrupt official away from catastrophe. Mark therefore encouraged the attendees to think on a systemic level about how to establish the conditions necessary for the Muhammeds of the world to provide for their families.

The second story described the protests of a woman nicknamed “Mommy” in Cambodia. In 2007, the constitutional monarch decided to lease land around a lack to a company controlled by a member of the Senate. Under the recent Cambodian land reform, such a lease was obviously illegal, but it did not matter. Mommy led protests for years and was beaten to within an inch of her life. The company was provided with licenses that showed they could destroy thousands of homes around the lake. Mark pointed out that folks on the political left would see such a situation and say “capitalism is to blame here,” while those on the right might argue “no, it’s totalitarianism that caused this injustice.” Mark said both can be correct; the real take-away is that, the more powerful an institution, governmental or otherwise, becomes, the more easily the rule of man can trump the rule of law. And we must always try not to lose sight of the people whose homes are bulldozed. It is vitally important to humanize markets and to remember that they are networks of human relationships.

The final story was about rice in Haiti and touched on three policies: agricultural subsidies, trade policy, and aid policy. Starting in the early 80s, the wealthy, agriculture-producing countries embarked on a policy of moving produce into poorer countries in an attempt to skip the agricultural economy and move straight into manufacturing. That did not work. Mark pointed to a few trends that led to the policy: the consolidation of big agriculture, small changes in US patent law, and growing subsidies that created incredible surpluses. To stave off a price collapse, the US needed to re-route some of its production into high fructose corn syrup, ethanol, trade, and in-kind donations to large non-profits that could turn around and sell subsidized food in developing markets (a method known as “monetization”).

That’s how rice swamped Haiti. But subsidized rice put about 100,000 Haitian rice farmers out of work, and while the absolute price of rice did indeed decrease, just as the donors intended, the relative price went up as the farmers’ purchasing power collapsed. The butterfly effects of US domestic policy rippled outward. Farmers were forced to abandon their lands and move into concrete buildings in crowded slums that collapsed in the Haitian earthquake. Mark pointed out that if we are interested in international development, we must also be interested in domestic policies, which function like steroids in competitive global trade regime, and which undermine our national reputation. Yet embedded interests can prevent needed reforms; starting in 2012 USAID pushed a procurement reform that would source 10% local goods for humanitarian emergencies. But the reform ran into big agriculture, big shipping, and big nonprofits in the US and therefore stalled. Mark argued that USAID falls under the State Department, whose mandate is to advance the interests of the United States, and he encouraged the participants to be on guard for the neo-colonialist undercurrent that often taints development work.

To close, Mark told the participants to try and recognize biases and paternalism; to question how our actions are perceived; to identify second, third, and fourth order effects of seemingly domestic policies; and perhaps most importantly, to recognize complexity. One can simultaneously recognize that many aid programs are masked stimulus packages for our own country and should end, yet still have real empathy for the global poor. One can believe in the good of markets, yet still see a role for humanitarian and emergency aid. Mark’s talk set the stage for the rest of the day’s discussion and was echoed across the following panels.

About the blogger: Mike Maruca is a 3L at Harvard Law and co-president of LIDS. He plans to work in renewable energy following his graduation in May 2018.

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