goodecon-blog

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who knew?

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Should you give to charity even though you can't be sure about the results?

Recently I attended a global poverty and social policy event hosted by the local chapter of my college alumni association. The speaker was Yale Economics professor, Dean Karlan, whose book is called More Than Good Intentions: How a New Economics is Helping to Solve Global Poverty. He is also President and Founder of Innovations for Poverty Actions (IPA), a nonprofit dedicated to discovering what works to help the world's poor. According to the mission statement, "IPA designs and evaluates programs in real contexts with real people, and provides hands-on assistance to bring successful programs to scale." 

"Does aid work?" is a question that creates a lot of debate and tension, with convincing information and statistics on both sides. Jeffrey Sachs is the most famous proponent of the "yes, aid works" camp. Bill Easterly is the most famous dissenter. What's really refreshing about Karlan's approach is that he doesn't take sides in this argument, which he finds ultimately unresolvable. Instead, he believes that the only way to deal with this question is to evaluate locally. Instead of making big sweeping theoretical proclamations based on a sample of case studies, you evaluate locally, decide locally, then scale up. This is what his organization is about, and from my layperson point of view, this seems quite sensible.

His organization and the work it does probably deserves its own post, so I'll limit this post to discussing some of his most thought-provoking and surprising remarks.

Should you give to charity even though you can't be sure about the results?

We've all probably thought about this, one time or another, and it's an important question. Even in the age of web-acessible annual reports that give a breakdown of an organization's income and expenses (all in easy-to-digest pie charts!), it's still possible to question what is actually being done with donor money. Short of actually going where your money goes to physically follow it around, you can't be sure of what's being done and sometimes this uncertainty causes people not to give, or not to give as open-heartedly as they might wish.

Addressing this question, Karlan talked about the contemporary philosopher (specializing in applied ethics and utilitarian perspectives), Peter Singer, who created an interesting thought experiment to try to think about charitable giving. The experiment is summed up (and critiqued) here:

The scenario with which Singer opens his book [The Life You Can Save] is essentially this – if you see a child drowning and there is no one else around would you wade in to save the child knowing that in doing so you will ruin your expensive shoes and be late for work.  The answer to this is obviously “yes” most people would make these small sacrifices to save a life. He then extrapolates this to philanthropic giving and argues that everyone should therefore regularly make small financial sacrifices in order to donate the money to charities so they can save lives in other countries.

Karlan goes further with Singer's scenario, saying what if you're not sure that you can save the child because you're not a great swimmer--do you still try? Or, what if you're not a good swimmer, but you see a life vest on the other side of the lake... do you try to get the life vest and throw it to the child even though it may not work and the child may drown anyway?

His point was that even if you're not 100% sure about the results, it's still better to give (or to try to save the life) because the alternative is not acceptable.

There are holes to this thought experiment, which you can read at the link before the quote, but this is a good departure point for thinking about giving to charity. Uncertainty about organizational accountability is legitimate, but probably not a good enough reason not to give. 

What are some programs that are proven to work?

Unless you really love reading nonprofit annual reports, it's a lot of hard work to find out which organizations work. Luckily, there are organizations like IPA and GiveWell that can help you make good decisions about where to donate money.

Karlan gave some examples of types of programs that are proven to work:

chlorine dispensers (for clean water)

de-worming children

commitment savings accounts

remedial education  

investment vouchers for agriculture

Programs that are proven not to work:

micro-credit lending programs *

training programs

Karlan does not recommend donating to micro-credit programs, which in some countries charge outlandish interest rates: 70% in El Salvador and supposedly over 100% in Mexico City. The high interest rates, according to Karlan, is due to the high risk of doing business in these areas. He mentioned that investing in these banks makes more sense than donating, which seems a topic for another post entirely. The big foundations, such as the Bill & Melinda Gates Foundation,** are moving away from funding micro-credit organizations. 

* In light of my recent posts about Grameen Bank in Bangladesh, I was curious to talk to Karlan about his thoughts about Yunus. As I mentioned in my previous post, Grameen Bank is a for profit organization that charges approximately 20% interest and has not received donor funds as of 1995. Therefore the question of donating to Grameen Bank is happily moot. (Grameen Foundation, on the other hand, is a nonprofit organization. I have not yet researched its merits, but perhaps one of the evaluating websites will have answers.)

Conclusions?

Give if you can. It's probably better than not giving.

Research where you give because even though giving is better than not giving, giving smart is better than giving dumb.***

Support the organizations that evaluate nonprofits because they'll keep us all honest.

** This, from Karlan's discussion. Not sure if this has been substantiated on their website. Will follow up.

***"dumb" as a manner of speech of course. Giving is never really dumb, in my opinion.

[goodecon-blog]

Global warming is one thing, but look what might happen if we continue to clear our forests!  We have to stop cutting down trees!  This is getting serious!

In all seriousness though, please plant and save our trees!

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The New Bottom Billion - ‘Where do the poor live?’

New IDS research shows that the global poverty ‘problem’ is changing. There is a new ‘bottom billion’ of 960m poor people or 72 per cent of the world’s poor who live not in poor countries but in middle-income countries (MICs). This is a dramatic change from just two decades ago, when 93 per cent of poor people lived in low-income countries (LICs).

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Revolution is not a dinner party.

Before I knew what the Cultural Revolution was, I thought that it was a period of time in China when people read amazing literature and attended operas all the time. You can imagine my shock and disillusion when I realized what it really was. Recently, to supplement some of my research about Korean politics in the 1970s, I decided to learn more about the Cultural Revolution. I found a YA (young adult) novel called "Revolution is Not a Dinner Party," which is about the Cultural Revolution from an 11-year-old girl's point of view. I imagine there are scores of books to be read on this topic before you could consider yourself well-grounded but I thought this was a really vivid introduction to what it might have been like to live during those times.

"Revolution" was written by Ying Chang Compestine, who grew up in Wuhan, China, where her father was a medical doctor and her mother was a Eastern doctor and herbalist. After Chairman Mao and his government came to power, Compestine's family was renounced as Bourgeois Sympathizers, her father was jailed, and her mother was demoted to overnight ER nurse. The novel is a fictionalized account of her life, with the main character, her father and mother retaining their real names.

Is it just me, or is it totally shocking how recently the Cultural Revolution happened and yet (in my recollection) it's completely not taught in schools? From 1966 to 1976 (Mao's death), millions of people were affected by the violent "re-education" efforts of Mao and his followers. "Affected" is a weak word to stand in for the culture of fear and collective surveillance that resulted in people getting jailed, beaten, divested of property and killed, without trial and often without evidence, just on accusations or gossip.

It's an eerie experience to read about this even as a fictionalized account, knowing that this is probably the same or worse reality that governs life in North Korea. It reminded me of this recent documentary filmed in North Korea (narrated by Lisa Ling, I believe around 2009) which reflects how difficult it is to draw the line between genuine devotion to the system and the practice of self-censorship/performance in order to ensure personal safety. Probably the hysterical performance of grief in the funeral procession for Kim Jong Il is another example of this. My guess is these people would have preferred to stay home instead of having to force themselves to wail and writhe in the snow... but who knows what advantages they gained by crying for the camera (or what disadvantages they avoided?)*

This post isn't explicitly about economics, but it does make me think about governing systems, capitalism, and of course communism. In some ways, communism seems historically inevitable as a solution to the scarcity and wealth problems human beings must face merely as function of being alive in this world, while the historical experience or consequences of communism in its extreme forms seem as if they could have been avoided if the ideals had been practiced without violence or coercion. I suppose the staunchest capitalists among us (guess it's clear where I stand) would say that there is no way to practice communism without violence or coercion, since it runs counter to the human condition. Personally, I tend to hope that people in their "natural" states would or could possibly be motivated by something other than just (more) profit, but then again, I often exist in idealized worlds.

Now (at least in this country and even more so in my birth country, South Korea) we are more likely to be strung up for being communist sympathizers than the other way around. In my adulthood, I have been surprised to learn just how virulently anti-Communist my father and grandfather's generations are (I name my paternal side not to be paternalistic, but specifically because they are from the northern half of the country before it became officially North Korea). I hear that there is a growing left leaning population in South Korea, especially in my generation (in our 30s) who have not experienced the war and therefore do not see the US as welcome liberators, but rather imperialists. According to my parents, at least this is the reason for their worldview, but this is again their bias. It is possible, after all, to have experienced the war and still feel that the US should have kept out. As for my parents' and their parents' worldview, I understand a little better after having read this little novel, what it may have been like for them when they lived in the north (before it was the North) and feared to be harassed or worse, as others were, for not welcoming the communist leaders of the North. 

* In case you think I'm being cynical or groundlessly speculative, Compestine also writes about how the 9 year old Ling was forced to attend twice daily crying sessions at school for Mao after his death. Ling makes a mental schedule of personal griefs to mourn each day so that she doesn't run out of tears after one third grader who tells the teacher he has run out of tears for Mao is sent to the camps. 

final note: I'm disgusted by the School Library Journal blurb on the back of my edition, which praises the novel for introducing children to "a time and place likely to have an exotic allure." Really, School Library Journal?? Repressive regimes are a lot of things, but they are not "exotic" and they are certainly not "alluring." FAIL.  

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Banker to the Poor: Muhammad Yunus

When you come right down to it, the concept of micro-lending seems just about the most obvious and yet counter-intuitive thing in the world. Lending someone the tiny amount of capital they need to launch a homegrown business that can help them feed themselves and their children, and also pay for other necessities like medicine, clothing and, after some careful saving, a proper roof to protect them against the elements, seems like a no-brainer. Of course we should do that. On the other hand, the idea of LENDING the money seems counter-intuitive, and it seems counter-intuitive for two paradoxical reasons. One reason is that most people balk at the idea of lending a poor person money because we've been conditioned to think we should give it as charity, especially if the amount is relatively small. The second reason is that under our usual banking system, loan officers don't give loans to people who don't have collateral. The assumption is that only people with collateral can be trusted to pay back what they have borrowed.

Muhammad Yunus, a Bangladeshi Economics professor, "invented" the concept of lending to the poor in 1976 when he returned to his home country after doing graduate work in the United States under a Fulbright Scholarship. Not content with teaching elegant economic principles in his University, where he was the head of the Economics department, he decided to walk around the neighboring village of Jobra and find out how poor people were actually living, and to see if he could think of more direct ways to help. The breakthrough came when he realized that people in Jobra remained poor because they were in effect indentured to local traders, from whom they were forced to borrow the tiny sums of money they needed daily to survive. For example, a local woman who made her living by weaving bamboo stools to sell to a trader had to borrow twenty-two cents from the trader in order to buy the bamboo. Then she sold the finished stool back to him for twenty cents, keeping only 2 cents profit. Yunus realized that this woman could only break free from her cycle of poverty if she could find twenty-two cents to buy the bamboo without having to borrow it from the trader. Then she could sell her stools in a free market and charge the full retail price to the consumer, not the middleman price to the trader. She just needed twenty-two cents. 

Yunus had his research assistants round up how many people in the village were in similar situations as this woman. It turned out that there were 42 people, who borrowed a total of 27 dollars. Here's an excerpt from the book that describes his reaction when Yunus first realized the root of the problem.

"All this misery in all these families all for the lack of twenty-seven dollars!" I exclaimed. 

My mind would not let this problem lie. I wanted to help these forty-two able-bodied, hard-working people. I kept going around and around the problem, like a dog worrying a bone. People like Sufiya [the bamboo weaver] were poor not because they were stupid or lazy. They worked all day long, doing complex physical tasks. They were poor because the financial institutions in the country did not help them widen their economic base. No formal financial structure was available to cater to the credit needs of the poor. This credit market, by default of the formal institutions, had been taken over by the local moneylenders. It was an efficient vehicle; it created a heavy rush of one-way traffic on the road to poverty. But if I could just lend the Jobra villagers the 27 dollars, they could sell their products to anyone. They would then get the highest possible return for their labor and would not be limited by the usurious practices of the traders and moneylenders."

Yunus lent these 42 people the 27 dollars out of his own pocket. Then he went to the banks to request that they institutionalize micro-lending. After many struggles, this eventually became the Grameen Bank, which has given loans to 8.3 million people (as of 2011), 97% of whom are women. As of 2007, loans have totaled $11.35 BILLION, of which $10.11 billion has been repaid.  

I think the revolutionary turn happened in Yunus' mind when he realized and declared that credit is a human right, that all people deserve credit, regardless of their ability to produce collateral. In fact, he has proven over the course of 35+years of micro-lending that his repayment rate is higher than 98%, much higher than the regular loan repayment rate. 

Micro-lending is not simply a matter of handing over money to a poor person and wishing them the best. Grameen Bank has evolved over the years, but the principal methods are as follows:

loans last one year

installments are paid weekly

repayment starts one week after the loan

interest rate is 20%

repayment amounts to 2% of the loan amount per week for 50 weeks

In addition, borrowers are required to work in groups of five so that women are able to help each other solve problems, keep each other accountable to their repayments schedules and also provide financial stability to each other if emergencies arise. Repayment is on a weekly schedule so that the amount is small enough to be negligible, not burdensome.

Yunus believes that the poor do not lack in skills, but rather that they must be highly resilient and self-sufficient, if they have been able to survive with so little. ("The fact that the poor are alive is clear proof of their ability. They do not need us to teach them how to survive; they already know how to do this.") Instead of spending time, money and effort on training programs, he believes the best way to help the very poor is to give them the capital they need to more effectively do what they have been doing all along. His philosophy puts him in opposition to international aid agencies, like the World Bank, which he often criticizes for "wasting" money on just the sort of thing he thinks are irrelevant and off-putting to local people (such as holding literacy programs, training programs, etc.) On the other hand, critics of Yunus, Grameen Bank and micro-lending have suggested that Yunus' ideas keep the poor poor (though less poor, relative to their pre-loan days), increase/enforce income inequality, and make them vulnerable to abuse. It is true that in recent years, there have been reports of "micro loan sharks" in India, although I can't think how other people's unethical, predatory behavior should be considered Yunus' fault.  

In the mid-1980s, after being rejected from the Central Bank to give out micro housing loans on the basis that such small loans ($125) would result in home improvements that would not raise the "housing stock" of the country, Yunus started a low-income housing loan program, which gave out loans of $125 on the basis that these homes also doubled as factories where the residents did their work. During the 80s and 90s to present, the Bank now has 2 dozen enterprises including the Village Phone program, by which women can earn money by providing wireless cell phone services to other villagers who pay to use their phone. Prior to the Village Phone service, many villagers had NO access to telephones and had to relay important messages via mail or in person. 

Yunus and Grameen Bank (Grameen means "rural" or "village" in Bangladeshi. The bank is now 94% owned by borrowers.) won the 2006 Nobel Peace Prize.

**

I intend to write a few more posts about Grameen Bank and the ways that it has influenced thinking about poverty in other countries, including the United States. In the meantime, I'll conclude this post with a few notes about the book itself. I've given just the barest bones introduction to the micro-lending and Grameen Bank. If you're at all interested in learning more, I would recommend reading this book, which is such a quick read. You will be able to read it in 2-3 days. It's written very conversationally, in the first person point of view (Yunus') as a kind of autobiography/memoir. As an added bonus, you'll get some very interesting insight into the history of Bangladesh. I, for one, had no idea that Bangladesh became its own country in 1971 after a Liberation War from Pakistan. Yunus gives a fascinating account of the early years of Bangladesh as a nation, including how he flew back to his hometown following the proclamation of independence in order to declare a new government. It's hard to believe that one day, you could be a grad student at Vanderbilt, and the next, you could be on a plane in order to declare an interim government of your burgeoning country--yet Yunus writes about it as if that were the most natural thing to do in that situation, and maybe it was. Just goes to show, maybe, that sometimes the people who make change in the world are those who don't think it's someone else's job to do so.

[goodecon-blog]

the bottom billion

I picked The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It to be my introduction to understanding issues of global poverty and international development, and I think it was a really good introduction. It's written by Paul Collier, who is an Econ professor at Oxford University. He was formerly the Director of Development Research at the World Bank. 

Collier has three central propositions, "each unfortunately fairly novel," which lay out how he thinks the development community ought to change their thinking about global poverty.

1. We should be most concerned about the "bottom billion" people who are the poorest on the planet. Instead, most development efforts currently focus on the "middle income" five billion, mostly because they are easier to help than the bottom billion and because relatively few development professionals want to live/travel to the bottom billion countries, which are not safe or "glamorous" in development parlance. If we do not take action to lift the economic standards of the bottom billion now, the world will become an even more dangerous place where the bottom billion grow even more distant from the living standards of the top 6 billion. 

2. Within the societies of the bottom billion, there is an intense struggle between "heroes" and "villains." These are the brave people who are trying to achieve change and the powerful groups that oppose them. "The struggle for the future of the bottom billion is not a contest between an evil rich world and a noble poor world." Collier describes how the moral and political problems facing the reformers of the bottom billion are far more extreme than the moral, political problems facing reformers in relatively richer countries.

3. We need to utilize instruments that have not conventionally been part of the development armory: trade policies, security strategies, changes in in our laws, and new international charters.

This last proposition is obviously the meat of the book, which is the most complicated and technical parts to understand. To his credit, I think that Collier describes his ideas for these instruments fairly extensively, even though this book is not explicitly meant for development professionals or researchers. (Although I can see how this would be helpful reading for students in the development field.) 

Collier also describes four "traps" that keep a country in stagnation: 

1. conflict

2. natural resources (lack of natural resources is bad for obvious reasons, but actually being resource-rich is also dangerous because it leads to bad governance, conflicts and an economic situation called the Dutch Disease, which basically means that everything else in that country becomes relatively expensive in light of the capital surplus associated with the resource.)

3. being landlocked with bad neighbors. Being landlocked is bad enough (since it cuts off opportunities for coastal trade) but if you're stuck with bad neighbors, who are locked in war or likely to attack you, or are just as poor or poorer than you, so are no help in providing export infrastructure (you can't get your exports out if your neighboring countries don't have good infrastructure) then you are not likely to experience economic growth

4. being stuck in a small country with bad governance

Here are some other facts that I learned from this book that I think are important/shocking/thought-provoking:

Regional cost of a civil war is an estimated $64 billion. SIXTY FOUR BILLION. 

Cost of a state failure= $100 billion

73% of people in societies of the bottom billion have recently been through a civil war or are still in one

38% of private African wealth is held in foreign banks. Meaning, as much as foreigners are afraid to invest in Africa, Africans are also afraid of domestic investment. The perception of risk is actually self-perpetuating and not as bad as reality. 

Over the last 30 years, international aid has added an average of 1% to the annual growth rate in the bottom billion. This may not sound like much but the growth rate of the bottom billion over this period has been ZERO. With aid, this region can be described as experiencing economic stagnation. Without this aid, these regions would have experienced severe decline. (just as a benchmark, China's 2010 growth rate was estimated around 10.3%, and the estimated 2010 growth rate in the US was about 2.8%) This mean, obviously, that aid IS actually effective, even though it is not effective to the extent that we may want. Also aid has diminishing returns. When aid reaches about 16% of GDP it ceases to be effective. 

Rebellions are encouraged by natural resource wealth but not by aid, while coups are encouraged by aid. 

Aid is not very effective in inducing a turnaround in a failing state. 

About 11% of aid leaks into military spending, which the author found "surprisingly little." (says a lot about what expectations we're working with here.) "This is not negligible, but on the basis of this it would be grossly unfair to claim that aid is wasted. Nevertheless in those bottom billion societies that get a lot of aid, even 11% adds up to quite a lot of the military budget. We estimate that something around 40% of Africa's military spending is inadvertently financed by aid." (p103)

I could go on with this, but I think this gives a pretty good overview about what sort of information this book provides. The best function of Collier's information and research is to provide a pretty balanced cost/benefit analysis of controversial topics like aid efficacy, military intervention, trade policies, global capitalism, etc. He gives you the info with only a little bit of editorializing, and you make the decisions. 

As a final note, I will add that I'm about halfway through "Banker to the Poor" by Muhammad Yunus, founder of Grameen Bank (and inventor of micro-credit to the poor in Bangladesh and beyond). Yunus is pretty unequivocal about announcing his hatred of the World Bank and other aid organizations that create policy without (in his opinion) understanding the "ground situation" realities of the very poor. I'll have a review of this book on another post, but it's just an interesting jump from this book, which is very policy- and research-heavy, but in my opinion does not seem ignorant of the situation on the ground. In my opinion, both perspectives seem necessary and helpful and probably should continue to work together.  

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inquiring minds want to know

I am starting this blog because I finally felt too uncomfortable about my lack of real knowledge and understanding about global poverty. There's a lot of information out there, but the way I'm receiving it makes me feel that I'm receiving a fractured, incomplete picture. For example, I can read a NY Times article about mass rape in Somalia, feel terrible about it... and then what? I know I don't understand the context around what is happening in that country, why it is in the shape it's in. Not knowing that, I can't begin to know how to respond in a way that doesn't just end at feeling terrible. 

Also, there are so many charities, most of which I assume must be doing wonderful work. Yet, I don't really understand what work they are doing, whether it's effective, and what would be the best way for me to do my part to support them. I hate the idea that I can just send an organization some money, even though I am relatively ignorant to what exactly happens with the money. Just sending a check as a way to make myself feel less terrible is not actually the point of sending money. The point is that I want to know what the money actually does. And I want to send it to places and organizations that are having the biggest impact with each dollar.

I know a lot of people, not just me, must have the same questions. I've put off trying to find answers because I suspect that the answers are complicated and controversial and I didn't know if I had the time to really find out. Well that's a terrible excuse not to find out something so important and I'm not going to let myself off the hook like that anymore. Hopefully this blog will help me think about some of these questions.