Where the streets have no names and the poor have no chance

It's been a while. Work has been busy (my company was just bought by our largest competitor), and although I've been able to contribute various posts to KivaFriends, I haven't been as active as I'd want to.

Reading through Kendall's reports on the state of his MFI in Nicaragua, I was reminiscing about old times.

I lived from January 1994 to August 1995 in Managua, Nicaragua. I came there as a student, did a graduation project designing and installing a remote wireless fumerola measurement station, that measured the temperature of smoke coming out of Nicaragua's most famous volcano, the Momotombo. After that, I worked for about a year at Siemens' Nicaraguan field office, as a project engineer for most of the "Planta Externa": everything from fiber optics transmission lines to wired local loop. Anyways, you can read that in my LinkedIn profile if you are really interested.

Nicaragua was an interesting country. Doña Violeta de Chamorro was in power, and Arnoldo Alemán was still the very popular mayor of Managua. Poverty was extremely widespread. And the population was very much polarized: you were either a Sandi, or against them. There was no golden path through the middle. Subsequent years have both show a slight increase of GDP (which is now slightly above Honduras), and unfortunately also an increase of corruption by officials. In all reality-- it was more of the same: Somoza's control over the complete economy by force, subsequently replaced by the Sandinista's "piñata" (redistribution of nationalized property to the personal possession of the top Sandinistas); Doña Violeta's government was accused of corruption (but may have been the least corrupt of them all), and once Arnoldo Alemán became president, he turned corruption allegedly into wholesale robbery.

The per-capita GDP in Nicaragua has stayed stably low from the years the Sandinista's left office, in the $3,000 to $3,500 range or $250-$300 per month. That this number doesn't mean too much (except that it's shamefully low), becomes evident if one considers that the gap between rich and poor is the 5th worse in the world. That means that tons of people live on much less, while the lucky few are rich beyond imagination. On average, you'll get to an income of $250 a month. As an aside-- click on that picture on the left. It was made with with GapMinder, a really fantastic tool that brings poverty into perspective.

Interestingly, although the Sandinistas messed up in many things, Nicaragua did get quite a good educational system. If we disregard some of the extreme poverty issues (like-- kids that need to go out on the street to beg for money won't get time to study, because this will take away necessary family income), primary and secondary is free while tertiary education is very affordable, even for local standards. Although rural access to health care is limited due to low popular density, free or cheap clinics are available in most urban areas. Arnoldo Alemán did shore up the road infrastructure, and cellphone coverage was good even when I was there in the mid-nineties.

This shows that even if many of the conditions are there to make things happen, it's really good governance that is a prerequisite to enable economic growth from the ground up. If that is missing and all is stacked for the rich and against the poor, not much will help. Even microfinance of poor micro-entrepreneurs won't be able to break the glass ceiling in the crawlspace of economic misery.

Finally, an anecdote. Kendall Mau talked in yet another one of his great blog entries about the lack of verifiable addresses in Central America. This is especially true in Managua. I remember that the travel agency I used in Managua was at "Donde fue el Hospital 'El Retiro", 2 cuadras al lago, 1 cuadra al arriba, portón verde". (That's from the spot where the "Retiro" hospital used to be, 2 blocks towards the lake, 1 block "up" (east), green gate). This was in the mid-90s, and it still appears to be the case. What made it even more interesting was that the Hospital 'El Retiro' was completely destroyed in the 1972 earthquake, and as a reference had been completely disappeared for many, many years.

If you had to do much through the mail, your best bet was a PO Box at Managua's central Telcor post office, which was an old, stately building in the old downtown, which somehow miraculously survived the famous quake.

During the Sandinista era, the rock group U2 performed a concert in Managua. It was their inspiration for the song "Where the streets have no names".

First loan fully repaid

Yesterday, I received the following message from Kiva:

From: Kiva
Date: 3 May 2007 21:43:26 -0700
Subject: Loan Redemption
To: ramon

Dear Ramon,

This email confirms that $25.00 of your loan to Venta de Mercancia por Temporada is now redeemable.

This amount can now be re-loaned to another business, donated to Kiva or withdrawn.

Kiva

To view your Kiva loan portfolio go to:
http://www.kiva.org/app.php?page=account
______________________________
Loans that change lives
http://www.kiva.org/

A big hurray for Antonio Luna. He paid back his loan. We'll reloan the money to someone else now. I'm hoping for Guatemala to come online soon...

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!

Yippee-a-yay, Haiti here we come!

It all started with Ben Elbinger's cryptic message to the Kivaloans Yahoogroup last night. A new country was coming on-line. A NEW COUNTRY!

Interestingly, a new country on Kiva.org is an occasion for excitement, enticement, and loan-spending debauchery. Especially when that country is this infamously poor. It's the only country in the Americas where the UN is actively soldiering, and it ranks infamously in the bottom tier of the Human Development Index-- the lowest of any in the Western Hemisphere.
Jean-Bertrand Aristide move over.... here comes Kiva. (Oh... sorry... the Haitian already took care of Aristide themselves. Credit where credit is due.)

If you live in Haiti, your prospects aren't particularly good. There is poverty and more poverty. There is violence and more violence. There is anarchy and more anarchy. In short: this is a place where jump-starting the economy from the bottom up makes a lot of sense.

Hence the excitement under us Kiva-ists.

The Kiva partner MFI that services Haiti is Esperanza International, with whom I already have a loan in the other side of Hispaniola-- the Republica Dominicana. And Esperanza appears to have a preference for Group Loans. They also provide business training and support to their borrowers.

The group loan principle is interesting. The way Kiva implemented this, is through a single loan to the "group leader". And although the group leader's business is featured in the loan description, the loan is distributed over multiple recipients that are jointly responsible for paying back. As long as the joint intention is to pay back, this actually has proved to increase the payback ratio. I've heard (mainly in some articles about Grameen's activities in Bangladesh) that this group loan principle can backfire too, when the group uses it's outstanding loan to collectively bargain for benefits, like new loans to people that would actually not qualify on their own.

My Haitian Star Entrepreneur is called Ivonne Soincilier, and she is from a place called Trou du Nord. (This literally means-- Hole in the North.) Among other things, she makes candles that are for use during the frequent power outages. Very much needed. Interestingly, thinking about the big picture, economic development will help her indirectly by better access and cheaper prices, but will hurt her indirectly by stabilizing the electricity supply and thereby reducing the need for candles. Still-- she will be successful, I am sure. She also makes soap, and I cannot imagine that anyone could use LESS of that over time! The sun will shine brightly over the Soleil Brillant business group. Bon Chance!

Finally, below is a quote from Ivonne's lender page:

Ivonne is a member of the Soleil Brillant solidarity group. She and her business represent 9 other micro-entrepreneurs who are members of the same solidarity group. Each members will receive a share of this $1,200 loan to develop their respective businesses. The cost of living in Haiti is such that Esperanza is able to fund 10 entrepreneurs who must make each payment together. If one person is unable to pay, the other members must make up the difference before any payment will be excepted. The community of 10 entrepreneurs have gone through Esperanza´s business training courses and have demonstrated their commitment and aptitude for receiving a loan to expand their business. Ivonne and the other members are responsible for working with one another as a social support network throughout the loan repayment and business development processes.

Go see Kendall Mau's blog!

For those of you that haven't visited Kendall Mau's blog in a while, or that haven't visited his blog at all, please do so. He recently added a WEALTH of information about the inner workings and considerations of the MFI he runs in Honduras and Nicaragua, Prisma Microfinance. There are interest rate tables, a discussion on large loans vs. smaller loans, flat rate interest vs. simple interest, some interesting background on who their target customers are, etc.

Really, really, interesting! Thanks, Kendall, very much appreciated!

Small loan to Dunia Herrera in Choluteca, Honduras

Since it's a new month, I just entered by bimonthly loan, my loan number 12. This one is to Dunia Herrera, why sells cloth in Choluteca, Honduras. Choluteca, in addition to having a cool name, looks on Google Maps just like the place I'd like to spend some time on vacation, with nice, palm-tree lined roads, grid-square neighborhoods, arable land along the river, and about half an hour's drive to the ocean. Looking at some of the pictures at Flickr.Org, the place looks reasonably clean, colonial, very much like an old, provincial town that you come across in so many Latin American countries.

Although this helped, the reason I invested in Dunia's business, is because I wanted to see how I'd fare with a small, reasonably short-term loan. All Dunia's been asking for is $225, which is probably the equivalent to about 2 months salaries. She'll pay this back in about 6-8 months, which comes down to about $40 per month, including interest. Assuming that her investment is "sustainable", which is, that she is able to increase her income on a continuous basis by at least the amount of loan payback, she's adding at least $40 to the family income per month. For many people in Latin America, this is a substantial increase of their monthly income.

She got my vote, and, as usual, I vote with my feet... eh... wallet. Her loan is now fully funded. Mucha suerte, espero que el préstamo hará una diferencia.

Kiva and longer loan terms

As I have described over and again, my believe is that in order for a micro-entrepreneur to be successful, the business (and thereby inferred--the micro-loan) needs to fulfill several objective and subjective criteria. If they don't, then the loan is not for me to invest-- it doesn't mean that I don't believe that the person won't pay back the money, but more that the loan won't have the impact on the business that will allow it to thrive, and thereby allow the entrepreneur to get ahead.
One of the criteria that I apply is based on the "general" loan-amount to repayment period. This was based on the following thoughts:

• The loan amount is in general directly related to the amount of extra revenue a business can make. Too much money can be risky, while too little money won't make enough of an impact. Generally, I am looking for a loan that will allow the entrepreneur to increase revenue at least by a factor of 2-3x the loan amount over the repayment period .
  
• Generally, I'd want revenue to be such that it will allow the borrower to repay about $100 per month in principal.
  

As a result, I was looking for $500-$1000 loans that could be paid back in about 6-12 months. I didn't want to be too rigid in applying the principles, but rather reject those loans that would be well outside these bounds.

And then I ran into a problem. As I didn't have any loans in Nicaragua, I was looking to add one. However, the loans available there, all through Prisma Microfinance, have a payback period that is about double of what I would expect.

So I emailed Kendall Mau, Prisma's CEO. And he was more than happy to converse with me on the topic. Here is an extract of his take on this:

Ramón: "The main reason for my concern is the ability for a small amount to really make a difference for a borrower. I assume that, due to Kiva rules, a micro-entrepreneur can only have 1 loan at a time. If a loan (for example) allows the borrower to sustainably increase revenue 3x the loan amount, the growth of the business is limited by 3x$nnn over the loan period. Alternatives would be to loan more over the same period (risky) or pay back quicker. Then, the borrower could qualify for another loan, which would allow them more growth in a shorter period."

Kendall: "I had this same thought, but my borrowers told me my theoretical thinking was not correct. If you make them payback faster, you are taking away the capital that they need to buy the materials and grow the business. This is why I see so many competitors out there giving really short loans, asking for payment every week or even days. The poor borrower isn't even putting the materials into use to produce the necessary income. If you're already having to payback substantials parts of the principal of the loan, you've stripped away the whole purpose of the loan. This is why we choose to give them longer paybacks to earn enough money to get ahead.

"I'm also an international consultant in the field. I was doing a project in Azerbaijan last year. They couldn't figure out why the borrowers were not improving financially. I looked at their loan fund and found that they were requiring such short payback periods that the poor borrowers didn't even have time to get the money working. Once we adjusted the payback periods, the borrowers were able to realize more revenue."

Well, let's say this. For me, now two of my 11 loans are through Prisma: one in Honduras, and one in Nicaragua. If Kendall can base his entire MFI's business on this principle and still make a social impact, I can support him in that with a few loans.

Soon to be Republica Bolivariana de Ecuador?

One of the advantages of investing into a local opportunity through Kiva is, that you, consciously or subconsciously, keep better track of what is going on in those countries in which you invested. And therefore, when things are happening in Ecuador, it jumps to the attention as more than half of my Kiva loans are in this country.

What happened?
Late last year, Ecuador elected a new president, Rafael Correa, who closely aligned himself with president Hugo Chávez Frias from the Republica Bolivariana de Venezuela (a.k.a. Venezuela), and with president Evo Morales from Bolivia. That fact alone is scary, as both Mr. Chávez and Mr. Morales have made it clear that they see a solution to poverty not in stimulating and formalizing production by the poor and creating opportunities for them to help themselves, but through mass nationalizations of the exploitation of natural resources, redistribution of wealth and other "give-aways". This will certainly help the poor a little bit in the short term, but will leave them without a way to fence for themselves, without an international market that can help them grow, and without a stable, self-sustaining economy in the medium and long term.

The first step that Mr. Correa is taking, comes right from the script of Mr. Chávez: dissolving parliament, and writing out a referendum to form a Constitutional Assembly in charge of rewriting the constitution. This constitution can then be taken as a guideline to take away any incentive the middle class could have to succeed, just like was done in Venezuela.

There is one interesting difference between Venezuela and Ecuador: a few years ago, Ecuador changed their coin unit to be the US Dollar. Although this doesn't mean that Ecuador therefore couldn't restrict foreign imports or dollar-flight, it possibly could dampen inflation a bit, since there is no way for the government to control the actual exchange rate. Inflation will be noticed by higher prices (due to scarcity because of import restrictions), without an accompanying increase of salaries: it's not the economy that grows, it's the articles that become less available. As a result, the poor will get poorer and the rich... well... I doubt that they will wait to take their assets out until Mr. Correa stops them.

There is another fundamental difference between Ecuador and Venezuela: Mr. Chávez can actually afford to be the way he is. As a major oil exporter of the world, the oil dollars that he receives, offset his spending spree up to a point where he feels comfortable giving away oil to the needier around him: Cuba, Haiti, Nicaragua, and... the poor in New York State and Massachusetts in the US! Ecuador, although not as needy as Bolivia, simply can't afford such a splurge.

That is was time to upset the corrupt power-balance of old in Ecuador, that's something to which many people can agree. However, to replace it by something that has proven to be disastrous time and again, simply hurts.

There is a thin silver lining around the cloud: When Mr. Correa's experiment goes awry, the Ecuadoreans have been know to quickly (and sometimes violently) replace their president: the country counted 8 presidents in the last 10 years...

See here and here and here for some related BBCNews stories.

What convinced me to make my latest Kiva.Org loan

I just invested my bimonthly installment of $25 into a cattle and rice farm called Hacienda la Maria, owned by Ivan Romero in Ecuador. What made this one stand apart from all others?

First, I should say that I am overinvested in Ecuador. Initially, I thought about investing in a pulpería in Honduras, mainly because I'd want to invest more in that country. However that one didn't really pass my loose "due diligence" standards: 12-16 months repayment period for a $750 loan means to me that the revenue generated from the venture isn't enough to make a real difference. If you can't pay back a $750 at a rate of $100-$150 per month, then you should think of ways to make more money of a business, or loan more money to drastically expand what you are doing.

So I was hesitant at first to invest another loan in Ecuador. Don't understand me wrong: my initial doubts were solely based on diversification. I think that Mifex is a FANTASTIC MFI, and I have built up a relationship via email with one of their principal loan officers and executives, Luis Crespo.

What pulled me over the brink was the expansiveness of the description. Simply great! There was a section on the geographical and safety risks, the background on why the associations were formed and how they would help guaranteeing repayment and reduce risks, as well as the simple opportunity description. Another factor was, that this business *can* repay $1200 in 7-11 months, and therefore his revenue (increase) will be well in proportions to the loan.

Are there other people putting in these criteria? I heard a rumor about a discussion on this at Pondering Pig's blog, I will have to check that out.

(off topic) Reading up on Perú

As should be well-known by now, I'm turning a bit into a Perú-o-phile or whatever you want to call it. As a result, I have been reading books about this country, both fiction and non-fiction. There is one writer you really cannot get around: Mario Vargas Llosa (often abbreviated as MVLL). He's both a good writer and a good (ex-)politician, and both in his fiction and non-fiction books he paints a picture about Perú that shows the spirit of the era, region, or events through his eyes. Although there is no such thing as a "monopoly on truth", his impression is often representative of the mood of the era, even if one doesn't always agree with his point of view or desired outcome.

Through him, and a well-known Peruvian economist by the name of Hernando de Soto, I am discovering a few things about Perú and myself. Most importantly, I have discovered that though I have a passion for trying to solve poverty and social issues, I am not a socialist in any sense of the word. I don't believe in redistribution of wealth because this will make the average wealth go down instead of up. I believe in creating opportunities and circumstances in which people can take advantage of opportunities. I fundamentally believe in a person's ability to fence for him/herself and to get ahead when the circumstances allow. But I also believe that creating these circumstances and taking care of those who do fall through the cracks is not a socialist activity; au contraire, it's enabling an economy to grow from the bottom up and prosper. And I believe that it is in the direct interest of the "rich" part of the population to make this happen: by stimulating the economy to grow from the bottom up, it creates a wide populus of consumers that allow overall economic growth.

To give you my recent booklist, read over the last 6 months:

• (finished) MVLL, A Fish in the Water (in English). MVLL's memoir about his youth and about his unsuccessful run for the Peruvian presidency in 1990. Highly recommended.
• (finished) MVLL, La Tia Julia Y El Escribidor (in Spanish). A half fiction, half truth novel about MVLL's relationship with "Aunt Julia" and his interactions with a colleague scriptwriter named Pedro Camacho at Radio Central in Lima, where MVLL worked in the 1950. Highly recommended
• (finished) MVLL, La Fiesta del Chivo (in Spanish). A novel around the assassination of the Dominican dictator Trujillo. Highly recommended.
• (finished) MVLL, Travesuras de una niña mala (in Spanish). A novel about a Peruvian guy that lives in Paris and his on/off obsessive relationship with his first love. I was a little disappointed by it because of its repetitive flow that made it ever more predictable what was going to happen next. Of course, this was intentional by MVLL to show the bourgeois character of the main personality, but still...
• (halfway through) MVLL, Lituma en los Andes (in Spanish). A story about a police lieutenant and his sidekick, investigating the disappearance of three workers from a mining operation in the Andes. Gives a good insight about life in the Andes in the 1980s, with lots of Shining Path terrorism going around, however staying lighthearted. Until now-- highly recommended
• (halfway through) Hernando de Soto, El Otro Sendero (in Spanish). A non-fiction, economic work on how the Peruvian informal economy worked in the 1980s, and how diminishing "red tape" and formalization of property and business by providing titles can help the poor break the vicious cycle of poverty. Hard to read for someone who is not an economist and speaks Spanish as fifth language, but extremely interesting. Note that although some of the ideas and truths he describes are controversial, but his research into "how did it happen" is fascinating. Until now, highly recommended.
• (still to read) MVLL, La ciudad y los perros (in Spanish). A fictive story about life in the Leoncio Prado Military Acadamy, a military highschool in Lima that MVLL attended for a year in the 1950s.
  
• (still to read) MVLL, La Historia de Mayta (in Spanish). The story of a Peruvian revolutionary and his failed uprising in the 1950s.