Friday, April 13, 2007

Poverty: why bothering is good for us

This post is in direct response to Richard Kent's encouragements to keep on investing in Kiva, in a thread at the Kivaloans Yahoogroup mailing list. Richard is the Ugandan CEO/D for Children Care Ministries, a religious based charity in Uganda.

My reply got a little long, therefore I post it here rather than sending it to the list.

Hi Richard,

thanks for your remarks on poverty. I think that's why we're all here at Kiva, to reduce poverty in a way that makes sense.
As someone that lives on the other side of the equation, it is hard to see billions of dollars and euros wasted in the developing countries to bad governance and and overall development aid attitude that used to be like giving fish to the people, instead of showing them how to fish themselves. I lived in Nicaragua in the 1990s, and I saw that many development projects weren't used at all to their potential: For rural developments, money would be spent without measurable improvement at the end of the projects, an expensive ferry project was successfully delivered and operated for about a year before it fell apart due to no maintenance, and projects to build schools weren't completed because the parents didn't want to cooperate. Overall, not good.

After a while, you ask yourself, why even bother?

Well, Westerners, we should. In this age of globalization, the economic empowerment of the poor in the developing world is not only good for the poor, but is essential for our own continued well-being. We need everyone to be prosperous enough to effectively produce whatever we need, and we need them to be able to buy whatever we produce. That won't happen if more than half of the population is too poor to feed and educate their children. And I don't even want to start about moral obligations, the nowadays always present homeland security arguments, etc.

In my opinion, the road to success doesn't lead to socialism as some of the socialist-leaning Latin American countries are now proposing. The reason for that is, that too much collectivism will stifle the individual drive to success, and therefore not give the individual the incentive to get ahead in life. Things don't come free in life, you got to invest, take risks, and learn from failures. While it's good to have a government that makes sure nobody falls through the cracks, you shouldn't have to rely on anybody to help you get beyond the mere basics of survival. Don't understand me wrong-- I'm not against collective bargaining or trade unions. Actually, collective bargaining is a sound economic principle: it's the reason of existence of the United States, the European Union, and on a much smaller scale, it's exactly why things bought wholesale are much cheaper than buying small quantities at the local corner store. It's a principle the staunchest capitalists use all the time.

I think that the development of the poorest should be based on specific short-term, medium-term, and long term goals, such as:
  • Short term: Micro-finance those people that have businesses and business ideas that have to potential to increase their income substantially. This will have all the well-known effects on those that receive micro-financing, but it also has the good side-effect of showing those on the side-lines what can be done, how it can be done, and enticing them to "work smarter" instead of just working harder... Kiva can play a good role in this.
  • Medium/long term: This is where NGOs and Governments can have a big impact. A number of issues would need to be addressed, and most of them are interrelated:
    • Infrastructure. In order for people to do business, we need roads, telecommunications, etc. With good communication and transport, the cost of doing business will go down and the geographical reach will increase. This means more opportunities at a lower cost. It will also allow people to increase their standard of living by being able to live in a place that is good to live in.
    • Education: This is really important and interrelated with the infrastructure goals. A higher educated workforce is more prosperous. Higher educated people have a better chance at earning more money. This is true everywhere: in the western world as well as in developing countries. And it cannot be reached without having a good infrastructure in place, both to get students to schools, to get good teachers to teach, and to be able to build a good school curriculum.
    • Health: Health and access to health care is very important because it will allow people to stay in the workforce and increase their economic abilities. This means that we need accessible clinics and good hospital care that allows those with sick family members to stay economically active. The economic opportunity cost caused by illness is disproportionally large in poor communities.
    • Legal framework: A good legal framework and good working legal system is a cornerstone of success for all businesses. In that sense, I am a believer in the work the ILD and Hernando de Soto is doing. Giving title to property, and being able to enforce titles, contracts, and other business instruments will allow a business to effectively use the capital that is "hidden" in their business equity. Land with title is worth more than land without, a contract that is enforcible will be more reliable and therefore worth more.
Enough for one post... feel free to leave relevant comments!

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