Close window  |  View original article

Doing Good Is Hard To Do

Antipoverty programs ruined by both failure and success.

By Will Offensicht  |  August 25, 2009

Making genuine improvements in the lives of poor people is extremely difficult.  We've written how Oprah Winfrey, one of the richest and most determined women in America, could not run a girl's school in Africa.  In America, welfare programs trap people in low-income situations, making poverty worse rather than relieving it.

What's more, do-gooding can cause worrying unintended consequences.  The Gates Foundation's efforts to cure malaria are worthy, but it's not particularly helpful to save people from dying of disease when they can't feed themselves and die of starvation instead.

The New York Times reports on an effort to create a market near Kabul where Afghan women could sell their products.  The market was put in a bad location and failed.

Part of the challenge in creating successful economic programs, say both the women who participate in them and the development experts who create and implement them, is a lack of follow-through. While there is no shortage of training sessions for women in everything from agriculture to handicrafts, there are often few buyers for the goods that women are learning to produce.

"Business needs a lot of passion, creativity, and hard work," Ms. Wafiq [who founded the failed shopping mall] said. "I am ready to try again because I don't want to accept that I failed; I will keep trying until I reach success."

Focusing on AIDS Costs Lives

The article "The Curse of Generosity" which appeared in the Wilson Quarterly, Spring 2007, p 61 points out that the Gates Foundation focus on treating AIDS in Botswana has had unintended side effects.

There is a grave danger that the current age of generosity could not only fall short of expectations but actually make things worse.

- Laurie Garrett, senior fellow at the Council on Foreign Relations

How so?  Much of the money is donated for specific diseases, such as AIDS, and can't be used for anything else.  Pregnant women whose HIV is controlled by medicine sometimes fall prey to leprosy and hepatitis when latent infections surge, but AIDS clinics can't treat those diseases.  Doctors say HIV-positive children die of vaccine-preventable diseases, such as polio and typhoid fever, while AIDS clinics are treating only their HIV symptoms.

Trained workers are lured from public clinics to work on donor-sponsored AIDS or avian flu programs, crippling the government's ability to deal with other diseases.

PRADAN in India

On an encouraging note, the India edition of the Wall Street Journal reports a successful program:

Deep Joshi, social activist and executive director of Professional Assistance for Development Action (PRADAN), is this year's recipient of the Magsaysay award, one of Asia's highest civilian honors. He recently received the award for helping lift more than 100,000 families out of poverty.  Formed in 1983, PRADAN believes that the way to conquering poverty is not through donations or handouts but by training and enhancing the capacities of the poor. [emphasis added]

PRADAN has noted that although handouts can improve people's lives in the short term, welfare recipients slide back into poverty when the programs are cut back.  The only permanent solution to poverty is to teach individual people how to improve their lives, set them up in sustainable employment, and help them train their children in turn.  These are a few extracts from the WSJ interview with Joshi:

... To bring about effective change in other people's lives you need to have a heart, to have empathy, but you also need knowledge. So that's the combination of head and heart.

WSJ: So its not enough just to have a heart...

DJ: No, its not enough to be just a bleeding heart.  When you work with a poor family who only have a couple of acres of land, no irrigation, whose resources and skills are limited, how do you help that family make a living?  You need to have the capacity to think on your feet, to develop ideas.  But you must have empathy too, the ability to care. You need both heart and head to be effective. [emphasis added]

Mr. Joshi echoes the Afghan experience in making it clear that it's essential to apply one's head to the problem of poverty along with one's heart.  Well-intentioned, ineffective programs often end up making poverty worse; it takes real brains and a great deal of hard work to develop a program that lifts people out of poverty on a permanent basis.

Mr. Joshi explained how hard his people have to work to set up long-term-effective programs.  Instead of doing their planning in air-conditioned offices, PRADAN workers get out into the villages, understand the situation on the ground in the real world, and work to make sustainable changes.

The unintended side effects of large donor-funded programs focusing too much on specific issues show how difficult it is to make lasting changes in societies which face many separate, but related problems.

Too Much Success

Even successful programs run into problems.  Microlending is the practice of making small loans to poor people to help them start a business or do some other activity which increases income; the extra income makes it possible to pay the loan back.  CBS News reports:

And a little bit of money can go a long way. Nelida Espinoza Flores, a 38-year-old Peruvian, for example, borrowed $115, to buy Jell-O and other snacks.  According to Microplace [a subsidiary of e-Bay], she spends about $5 a day on supplies, which results in between $10 and $13 in sales.

Microlending, like other uninsured investments, is subject to all sorts of risks.  But, based on past performance, the odds of seeing your money again are pretty high.  Historically, 97 percent of low-income borrowers have paid back their microfinance loans.

To everyone's surprise, microlending turned out to be fairly profitable.  The Wall Street Journal reports that a micro-credit bubble is developing in India:

Microlending fights poverty by helping poor people finance small businesses -- snack stalls, fruit trees, milk-producing buffaloes -- in slums and other places where it's tough to get a normal loan.  But what began as a social experiment to aid the world's poorest has also shown it can turn a profit.

That has attracted private-equity funds and other foreign investors, who've poured billions of dollars over the past few years into microfinance world-wide.

It's becoming the usual case of too much money chasing too few loans which are able to generate the income to pay them back.

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change.  Suddenly, in the shantytown where she lives, lots of people wanted to loan her money.  She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more.

"I took from one bank to pay the previous one.  And I did it again," says Ms. Taj, 46 years old.  In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.

Given that her annual income is about $400 and she spent the money on a TV and other household equipment rather than on improving her business, these loans turned out to be difficult to pay back.  Does this sound familiar?

Many of the problems in Indian microlending might sound familiar to students of the U.S. mortgage crisis, which was worsened by so-called "no-documentation" loans and by commission-paid brokers.  Similarly in India, microlenders' field officers are often paid on commission, giving them financial incentive to issue more loans, according to Ms. Kamath.

It sounds like commissions should be withheld until the loans are paid back rather than being paid as soon as the loans are issued.  Losses are coming.  Money was lent to people who couldn't pay it back under any circumstances and the recent drought is forcing food prices to creep up.  When given a choice of paying a loan or eating, what are poor people going to chose?

Lenders are aware that applicants often lie on their paperwork, says Ujjivan's founder, Samit Ghosh.  In fact, he says, Ujjivan's field staffers often know the real story.  But his organization maintained a policy of "relying on the information from the customer, rather than our own market intelligence."

He says that policy will now change because of the trouble in Ramanagaram.  The lender will "learn from the situation, so it won't happen again," he says.

When was the last time a banker said it wouldn't ever happen again?

Microlending clearly has benefited a great many poor people; it's too bad that it turned out to be so profitable.  One can only hope that when the bubble bursts, the losses won't prevent social-service oriented organizations from getting back into the legitimate part of the microlending business.

If the past is any guide, unfortunately, the crash will cause governments to write rules which will make the workable parts of the successful microlending process unworkable so that no one will receive any benefit at all.

Doing good is hard to do.