Beyond microfinance: why the poor are poor?

Why the poor are poor, is the perhaps the correct question to ask before anyone jump into the microfinance wagon and cruise the unknown territory without knowing why and how.

Many people are now seems to like and find microfinance as exotic and the conversation to talk in intellectual circles or conferences. Anyone who started the conversation with a mention of microfinance will become the centre of attention and earn a bragging right to continue bluffing or, hardly the case, tell a glorious experience he ever had with a fight against poverty.

The ‘success’ and inevitable rise of Grameen Bank to the world scene has also elevated the role of microfinance in poverty eradication movement as well as its image as a front-runner in global development program. Microfinance also partly save the face of global finance, which was hurt by series of global financial crises and the many antics its members are displaying, including the case of Maddoff or the impossible lifestyle of many Wall Street executives.

The ‘why poor’ question is important to ask, because it is common sense and finance is not necessarily the only solution to poverty!

The euphoria of microfinance, I notice, has created a misguided perception that poverty can only be reduced by microfinance. It is a sort of illusion that has been created by microfinance since it received a superstar status from Western media. It is somewhat justified though, as many other initiatives to fight poverty in poor countries have failed, including foreign aid or development assistance initiated by developed countries.

This also created a false conclusion that the poor are poor because they have little or no capital to build up their life. The poor are poor because they can not get the loan or means of financing. While this is true for some, the whole picture is much more complex.

Hernando de Soto in The Mystery of Capital, for instance, argues that the lack of capital among the poor is not about lack of access, rather lack of entitlement to the assets most poor already have. He argues that their land’s true value is locked and not able to be converted into useable capital or cash. So, if de Soto is right, the solution that may be applicable is certainly not microfinance, rather a land reform or similar reform in assets titling.

In Asian context, Asian Development Bank (ADB) in a 2006 report suggests that the causes of poverty are largely due to deficiency in five types of capitals, namely human, natural, physical, financial and social capital.

• Human capital deficiency relates to lack of access to quality and affordable food, health and education by the poor.
• Natural capital involves the lack of access by the poor to land rights (similar to de Soto’s argument) and natural resources amidst depleting environmental quality.
• Physical capital reflects the lack of access to clean water, sanitation and safe housing.
• Financial capital deals with lack of access to employment and business opportunities.
• Social capital indicates lack of participation of the poor in the economy and lack of security (ie. the presence of violent conflict in their community).

I believe the above do not only apply exclusively to Asia, but might also be applicable to other regions elsewhere like the Sub-Saharan Africa or South Asia.

It is obvious that the core reason why the poor are poor lies in the absence of sustainable, secure and sufficient source of income or means of living for them. In other words, the problem of poverty must be addressed with a comprehensive solution or action through the creation of sufficient, sustainable and secure sources of income for the poor. In essence, creating jobs and business opportunities.

To me, these are the main focus for poverty reduction program. Microfinance too must look at how it can complement and contribute to the creation of jobs and open access for the poor to start their businesses. How microfinance plays along this broad brush solution is perhaps the better question to ask, and act, for anyone wanting to become a centre of attention and emerge as tres chic in intellectual circles.****

My affairs with Microfinance: a forgotten encounter

I recently attended a small talk on microfinance program in Indonesia, and got involved in interesting discussion on how microfinance is transforming lives of millions in Indonesia and the world over. The speaker and most of the audience have the same impression that microfinance has provided necessary optimism that poverty can indeed be eradicated.

This event struck me, not just as a reminder that some good things are happening in Indonesia and microfinance field, but also a subtle reminder to my own brief encounter with microfinance. It was sort of a forgotten episode of my life and sunk at the very bottom of my consciousness.

In 1999, I had a two weeks experience staying with a field officer of Amanah Ikhtiar Malaysia (AIM) in Tumpat, Kelantan. I was doing a small research on AIM as part of my proposal writing process for my Master of Economics program at University of Malaya. I wanted to write on microfinance comparing Malaysian experience and that of Indonesia. However, after I get admission and learned other stuff, I lost interest and changed my final research paper to something else.

However, the experience stayed in me and it was a profound one. It opened my eyes to the reality of poor people in Malaysia, successful members of AIM, dedication of young field officers and to the many challenges facing AIM to transform lives in some of the poorest villages in Malaysia. AIM is probably among the most successful MFIs in the world, in terms of effectiveness in poverty reduction, thanks to its Grameen model operations and strong government support.

However, as it turns out later, the same government support has also somehow ‘paralysed’ AIM and other microfinance initiatives in Malaysia, although it has its own merit in overall poverty eradication endeavour. The MFIs have to continuously compete with politically motivated government programs (subsidy) that are aiming and targeting the same group of poor people in Malaysia, who are mostly live in the stronghold of opposition party. Not only the government created unnecessary competition in the field but it also created a disincentive for the poor to borrow from the MFIs and seek government grant instead.

AIM itself is not entirely commercially driven, since AIM is established and partly owned by Yayasan Pembangunan Ekonomi Islam Malaysia or YAPEIM, which is part of Prime Minister’s Department. It receives regular funding from government’s budget and thus affected by any political changes in the government.

I also learned, during this very brief encounter, that poverty reduction is not just a responsibility of the MFIs. In fact, Malaysian MFIs are not well known compared to Grameen bank or Banco del Sol, simply because Malaysian poor are different from the poor in many developing countries like Bangladesh or Colombia. The poor in Malaysia has a strong government on their side, politically motivated or not, and they live in a growing and robust economy where jobs and opportunities are aplenty.

Poverty reduction in Malaysia is very much a comprehensive program, rather than a piecemeal and sporadic efforts. Malaysian government realised that the causes of poverty were not just lack of access to finance, but also poor education, inadequate infrastructure, lack of jobs and missed opportunities. So, the government then invested a lot of money to build world class infrastructure, improved educational system, sent thousands of young people to study abroad, attracted FDIs to create jobs and provided numerous incentives for people to open up a business venture.

In the end, the success of Malaysia in reducing its poverty from 52.4% in 1970 to 5.5% in 2000 (according to a study) is not just a microfinance miracle. I believe it lies with the right development policy and implemented by the government who care of its own people, rich or poor. Of course, we can argue elsewhere on Malaysia’s growing inequality, lack of press freedom, corruption and many other things. But the fact that Malaysia has been successful in its fight against poverty stays.

In hindsight, with this massive cut in poverty, I think the role of Amanah Ikhtiar Malaysia and for that matter MFIs in poverty reduction is merely a minor one. Government policy indeed plays a bigger and more significant role in any attempt to eradicate poverty.***

Habibienomics vs Widjojonomics revisited

Last week I met a former engineer of IPTN (or PT. Dirgantara Indonesia, as it is now called) who told me a heartbreaking story of Indonesia’s failed leap frogging and economic advancement. He came to the UK to study aeronautical engineering, but the Indonesian crisis of 1998 and eventual problem with IPTN/PTDI, forced him to stay in the UK.

His is not the only story. Thousands of IPTN engineers fled the country to serve Boeing or Airbus and live the US and Europe. Some others live in Asia and Australia and dedicate life for global companies.

Few days ago, the most celebrated architect of Soeharto’s economic development, Prof. Widjojo Nitisastro, passed away leaving behind much praised legacy and mournful disciples and contemporaries. Prof. Widjojo and and his colleagues in the government were known as Mafia Berkeley.

Their economic wisdom has transformed Indonesia and own much credits to Soeharto’s economic success. While working alongside B.J. Habibie, these economic technocrats never really supportive nor pleased with his projects. But they could not do anything though, as Habibie was Soeharto’s favourite minister.

Habibienomics is simply an idea of pursuing economic advancement by leap frogging development stages. Instead of moving structurally, from agri based to manufacturing based, Habibie advocates a technology based economy and leap frogging many stages prescribed by Widjojonomics, or for that matter conventional wisdom.

I find its a hard-to-believe coincidence. To commemorate, I dig hard into my old files to find below piece, which I wrote in 1997 as a term paper for the Asean Economics subject during my final semester as an undergraduate. ****

Food prices and Indonesia’s poverty

I recently started a small project to look at the impact of rising food prices to poverty incidence in Indonesia. I found the major food crisis in 2007-2008, and to a lesser extend in 2010, particularly disturbing. I am somewhat convinced that this could be the beginning of recurring future food crisis.

During this period, staple food prices in most countries rose significantly. From 2006 to 2008, the average prices for cereals increased by more than 100 percent in emerging economies; 217% for rice, 136% for wheat, 125% for maize and 107% for soybeans (Obayelu, 2011).

In 2010, the international prices for these cereals also increased by similar magnitude; the World Bank Food Price Watch index rose to nearly 2008 level in February 2011. It means, we were so close to experiencing double food crises in just four years.

Excessive increase in food prices has raised concern that people in low-income countries will be at higher risk of hunger and malnutrition. The same problem may be felt by majority of the poor in most middle-income countries like Indonesia, where social security system is not well established.

A study by Ivanic and Martin (2008) of the World Bank, estimates that the higher cost of food will result in 44 million people to become poor or poorer in all low-income countries.

Abbott (2009) fears that the poor in many low to middle-income countries, who spend large amount of money on basic foods, will suffer and hurt the most. He highlights the conclusion of the IMF that negative macroeconomic consequences of rising food prices will prevail; namely increased in inflation, lost of tariff and export revenue, deteriorating terms of trade and slowing down in economic growth.

Global Hunger Index 2011 of the International Food Policy Research Institute (IFPRI) also reveals an even darker picture. It asserts that the 2008 food crisis has generated social and political turmoil in many developing countries, in addition to economic difficulties and violent social unrest.

There is no agreement on the causes of this crisis. Mali, et al. (2012) suggests that food speculation and ethanol conversion is responsible for the food crisis.

Asian Development Bank (2008) asserts that the main causes for the price spike and food crisis lie in the structure and dis-functioning of the markets.It argues for the cyclical factors of food production, increasing demand in developing world and dynamic of global commodity markets.

What seems to be agreed is that many countries will have to deal with increasing trend of food prices beyond 2008 or 2010. The impact on poverty is the most pressing issue, as higher food prices may create a set back in poverty reduction program by many countries. Indonesia is no exception.

As an emerging economy with population of 240 million, Indonesia’s effort to reduce poverty rate will be at risk of failing. It has been successfully doing so by cutting poverty incidence from 18.2% in 2002 to 13.3% in 2010 (World Bank Data, accessed February 2012).

During this period, Indonesia experienced one set back where poverty level of 16% in 2005 increased to 17.8% in 2006, although it declines again afterwards. The link between this set back and rising food prices is obvious at the outset.

There is a need to carefully identify all possible causes and effects of the rising food prices for Indonesia from 2008 to recent one. While the prices hike in this period are milestones for this kind of undertaking, overall trends in global food prices from 2000, or even earlier, should be thoroughly considered.

The research or analysis should also look at Indonesia’s past economic policies, including structural transformation, food subsidy, rice self-sufficiency and even oil policy.

The usual response of the Indonesian government, notably stabilization policy, to contain rising food prices also plays a role. Indonesia is rather known to rely on food stabilization policy, especially on rice. This may even take the analysis into political realm, especially around the key role of Bulog and DPR in this labyrinth.

Seems like a long but exciting journey for my little research!***

Capitalism and moral

Last week was interesting for me. UK’s politics suddenly fuelled with debate on ‘responsible’ or ‘popular’ capitalism; the former being raised by Labour chief Ed Miliband, while the later came out from the PM’s very own statement. Both argued for a more sensible form or capitalism, or as @BBCBusiness puts it ‘moral capitalism’. Odd that they finally came to an agreement of sort.

In the same week, FT published an article by Prof. Jeffrey Sachs, of Columbia University, entitled Self Interest, without morals, leads to Capitalism Self Destruction. He too argued that capitalism is in danger of losing its credibility, as demonstrated by Eurozone crisis to social movement in Wall Street, and now is the time to take radical actions.

Moral is not new to Capitalism, at least in the form envisioned by Adam Smith. In fact ‘moral’ predates and part of the ‘self interest’ and ‘invisible hand’ concepts developed by Smith in the 18th century. Smith’s Theory of Moral Sentiments was not only his earlier and more superior work, but also laid a foundation for the operational efficiency of a self-interest servicing market he advocated in more famous Wealth of Nations.

In the work, Smith critically examines the moral thinking of his time, and suggests that conscience arises from social relationships. His goal in writing the work was to explain the source of mankind’s ability to form moral judgements, in spite of man’s natural inclinations towards self-interest. Smith proposes a theory of sympathy, in which the act of observing others makes people aware of themselves and the morality of their own behaviour.

The quote from Wikipedia above is an opposite and far cry from what is practicing by many ‘champions’ of Capitalism. These are the people who benefitting more from the supremacy of capital than most of the people. The 1% group, in the jargon of Occupy Wall Street activists, or ‘the super class’ that dominates political and economic powers, have shown no sympathy towards the ‘underclass’ and the squeezed-in-between middle class. They live a life far different from the majority of us; who everyday have to deal with job cuts, increasing health bills, expensive children education or difficulty in paying taxes.

The Telegraph recently runs an article on the Overclass in the United States and UK, portraying growing exclusivity of the super rich. This article is partly based on the new book by an American Sociologist Charles Murray, Coming Apart.

Murray exposes how the new United States upper class, which he labels a “cognitive elite”, has developed an hereditary stranglehold over the top professions and management positions. The brightest people tend to marry each other, then ensure that their offspring get to the best schools and universities, with the result that, to quote Murray: “The parents of the upper-middle class now produce a disproportionate number of the smartest children.”

Their exclusivity doesn’t stop there, they even live in the same enclave.

These gilded families then inter-marry and socialize together, living in the same areas, creating a phenomenon which Murray labels “super zips” – the 800-plus richest and most desirable postal codes in the United States, where the cleverest and richest congregate.

This of course has nothing to do with moral, as it is perfectly humane for people of the same likelihood, common interests or background to come and live together. However, their lack of sympathy – in the word of Moral Sentiments, is what troubling and creating the dissatisfaction among the masses. The case of hefty bonuses for senior bankers, minutes after their banks rescued with public money, is what being resented. Hence the issue of moral.

Occupy Wall Street and other social movements in the developed world is an antithesis of current practices of capitalism. People in the streets want a change, a radical one. And the fact that now politicians and mainstream media are covering it more prominently, means that the voice is now being heard. Whether it will change the practice, or capitalism itself for that matter, is another issue.

Perhaps only time will tell.

Crises Years – update

If we ever want to document the dates or years of recent economic crises,  we may have to write faster now as the crisis is getting more frequent and more devastating. Just for my own records and amusement, I have started the counting dated back to 1997. We will see how fast can I cope with the up coming ones:

1997-98: South East Asia and part of East Asia (in fact, only South Korea) suffered enduring years of financial crisis where banks collapsed and financial system breaks down. Interestingly, regimes also collapsing; Soeharto stepped down and Malaysia’s Deputy PM was fired (allegedly for moral misconduct and partly for his opposition to currency control imposed by the PM).

2008-09: US and most of Europe suffered from the largest financial crisis since Great Depression. Few big names in Wall Street and Lombard’s called bankruptcy; AIG, Lehman Brothers.

2011: Middle East. All politically driven and nicely called as Arab Spring; but since the region is home to 80% of oil reserve in the world, the impact is worldwide and economical.

Europe. Default on Greece government bonds has dragged the whole Eurozone, and in fact Europe, in tatters.

2012: as Eurozone is suffering with more defaults and rise in unemployment. The latest blow is a downgrade of most EU members’ credit ratings by S&P, notably dismantling of AAA status from France and Austria.

Another possible crisis is due to oil. The tension in the Middle East has escalated in January as the US pressed forward with more serious economic sanctions on Iran. But Iran may be fighting back: oil exports embargo may be responded with closure of Hormuz to cause massive interruption in the out flows of GCC’s oil exports to Asia Pacific, or war.

Either way, the global economy looks un-promising and we may have to prepare with a possible double crises in 2012.***

Business – government relations and abuse of power

In 1998 or 1999, I wrote an essay for my Post-Graduate’s Malaysian Economy subject on relationship between business and government. The question posed by Prof. Jomo K.S was ”Under what circumstances do close government-business relations lead to abuse?”. I found this piece today, hidden among many old files, and thought the issue and the points that I raised is still quite relevant, especially to country like Indonesia. This is however, does not represent my current view on Malaysian economy as time has changed considerably. 12 years is a long time for a change. I thought more of my own country when I re-read this piece.*

Any corrupt relationship between government and business sector, individual or corporate, takes place in a ‘give and take’ manner. That is both parties mutually gain. In most cases, this relationship started long before anyone of them attain power in their respective fields. They can be friends, employee-employer, etcetera. This long/special relationship later on became a basis to ‘justify’ allocation of any privileges or rents to these friends or ‘cronies’.

These and other features as outlined below are some of the circumstances that lead to abuse as the result of a close relationship between government and business sector.

1.  Strong political patronage in the business sector

The rise of new political regime in early 1980s, and instalment of New Economic Policy (NEP), had created a new breed of Malay/Bumiputera businessmen with heavy political backup. The NEP, apart from achieving its poverty reduction objectives, has also increased the Bumiputera’s equity ownership across the board in the Malaysian corporate scene. And most importantly, the policy has created many Malay noveau riches. They are politically connected and gained wealth through various government projects, businesses and protections that are not available to non-bumis.

The non-Malays responded differently, some even changed the tactics. While losing some grips in the economy due to NEP, they moved on and played along. Few like Ananda Krishnan and Vincent Tan, have emerged as new taipan through their special relationship with bumi politician and UMNO (leaders). In fact, such patronage is so strong that many retired high-rank civil servants  and politicians are holding patronage positions (i.e. Chairman) in many Malaysian companies, including non-bumi companies.

2.  Use of economic rents by government in its pursuit of both political and economic goals

Such rents include discounted privatisation, overpriced contracts, permits and licences, special loans and credit facilities, and subsidised training and education opportunities (Gomez & Jomo, 1999).

The real purpose of the rents is arguably to encourage investment in the new productive activities and accelerate industrialisation. The other intent was to create a redistribution of wealth, through some affirmative action programs like NEP.

However, in practice, the creation and disbursement of these rents have been used to maintain a political hegemony of the ruling elite and such rent-financed and patron-client relations continue to become a political games, and not an economic policy of sort. It is still important in Malaysian politics until today.

3.  Favouritism

The argument is related to the previous two. Although it is not always the case that the beneficiary of government policy in the private sector are Malays, but many argued that a lot of government policies have been directed to benefit exclusively the Bumiputeras or Malays. However, in post NEP policies – including Vision 2020, emphasis on Bumi has changed considerably.

Nevertheless, the government is still seen to practice favouritism in many of its projects and dealings with the private sector. It may have change its approach somewhat, but not in in substantial form. If the previous emphasis was “Malay”, now it is on ‘Malaysian”, that is to include Malay and some select group of non-Malays. Privatisation projects of ro Rail Transit services, Mobile Telecommunication, and few other big projects are given to this group of cronies.

In sum, if this phenomenon persist and the ruling government continue to practice a corrupt governance, only time will decide whether the fate of Soeharto will be reiterated in Malaysia. We hope not.***