Monday, February 16, 2009

Don't Patronize, Please

Note: This is a blog post I wrote for Wokai. Wokai is a website that allows you to lend money to the poor in China. You can also find this post on the Wokai Adventures blog.

Al Hammond: “…Most of what Mr. Karnani says seems just silly—armchair theorizing. His numbers are wrong—as we have already explained in detail elsewhere, although he does not acknowledge the criticism. And he misquotes me and attributes words to me that I’ve never spoken, thus underscoring his questionable scholarship...But it is his larger critique that is more troubling.”

Aneel Karnani: “Al, I am sorry that you are not happy with my article…that certainly was not my intention…I take scholarship seriously, and would appreciate it if you would substantiate the charge of ‘questionable scholarship.’”
The above email debate between Ashoka’s Al Hammond and University of Michigan’s Aneel Karnani was posted (with permission) on Next Billion’s blog last Thursday. Their exchange was sparked by an article that Karnani wrote back in December. The article, “Romanticizing the Poor,” was published in the Stanford Social Innovation Review, and it was provocative.

In the article, Karnani argues that market-driven solutions to global poverty are in need of a serious reality check because they assume that poor people are rational consumers and innovative entrepreneurs when in fact they aren’t. To Karnani, this romantic picture of the poor gives multinational companies (MNCs) in the tobacco, alcohol, and consumer products industries license to exploit poor people with harmful, unnecessary products; and it encourages the misguided notion that microfinance is a realistic means of alleviating poverty. For Karnani, the real harm comes when governments begin deferring their responsibility in the fight against poverty to the rosy market. Karnani pleads, “More Government, Please.” A few quotes from his article:
“But poor people seem to lose control more often, for reasons that reflect the realities of their daily lives.”

“Mounting evidence suggests that just being poor hinders people’s ability to make good decisions.”

“I have found little evidence suggesting that poor people are particularly discerning consumers or creative entrepreneurs.”
There is nothing romantic about the poor or being poor – anyone who has experienced poverty can tell you that – but please don’t patronize the poor either because:

Change needs to come from the bottom level. The quest for growth in poor countries has been long and elusive. In his book The Elusive Quest for Growth, William Easterly shows that in the past 50 years, foreign aid, capital investments (both in machines and humans), population control, policy reforms, and debt forgiveness aren’t the answers when it comes to explaining growth. When Easterly spoke at Stanford last spring, he concluded his talk by admitting that experts can only do so much to understand and promote growth. Instead he focused on the individual, specifically on the idea of the creative individual and individual responsibility.

Entrepreneurship isn’t classy. I agree with Karnani in that governments need to stay involved in the welfare of the poor by investing in infrastructure and reforming policies, but we’ve seen that neither government investments, nor policy reforms are the elixir to sustained growth and improved lives. Before we dismiss the poor as incapable of an entrepreneurial life, we need to consider for a moment that entrepreneurship isn’t just for the elite. Sure, poor people with cool ideas may not have access to the training, resources, and funding that their wealthier counterparts have, but all that can come with time and experience, while the vision of those ideas can never be taught.

Not all MNCs exploit. It’s suspicious that the only examples Karnani refers to in his article are MNCs in the tobacco, alcohol, and consumer products industries. What about, technology? Cell phones have penetrated developing-country markets at rapid rates, leading to interesting and beneficial services that run off the mobile platform, including mobile education (mEducation), mBanking, and mHealth. In the nascent field of mHealth, for example, the cell phone is quickly proving to be an efficient means of healthcare delivery in areas where health infrastructure is severely lacking. The introduction of mobile phones in the developing world means greater connectivity, which means more access to information and heightened transparency. The case study of fishermen in Kerala is a compelling one. (The illustration at the very top is by Belle Mellor and was used for The Economist's article "The meek shall inherit the web.") When healthy incentives align all players in the value chain, and value is delivered to each player – MNCs, governments, nongovernmental organizations, and the poor people themselves – you can’t call that exploitation anymore.

Everyone has the right to invent and innovate, and to make decisions to buy things without judgment, and if you can free yourself from a life of poverty in doing so, that’s a beautiful thing. “Freedom is just another word for entrepreneurship.” I believe in that.


tshaw said...

I actually agree with many of the points that Karnani makes in his article. I think most people would agree that poorer people more frequently encounter environmental and social stressors that in turn influence them to make decisions adverse to their long term interests. And who could blame them, when they are literally living hand to mouth.

I spent part of last summer working in Phnom Penh for an NGO, and I think Karnani has a point when he basically says that poor people like to drink/smoke. I saw plenty of this during the 5 weeks I was there. I also tried to convince one of my friends, who also drove me around on his motorbike and made less than $100 a month, to open a bank account (since he drove me to the bank/ATM a few times). He would always mention to me how he never had enough money and how he was always on the lookout for new jobs, but then he would tell me stories of how he spent $40 in one night drinking with his friends/boss, or how he was robbed of one month's salary after a late night karaoke session. I tried to tell him that if he really was serious about making more money, he had to start by saving it and putting it in a bank. I'm not sure if he heeded my advice. The point of that story was just to say I witnessed firsthand some of the things Karnani mentioned in his article.

However, we should be careful not to generalize or stereotype everyone making under $2 a day as incapable of making rational decisions. At the risk of perpetuating stereotypes, I have come to think that poor people living in cities versus those living in rural areas might approach poverty and microfinancing with different perspectives. I really can't pinpoint any concrete reasons for this, but for some reason I feel like microfinancing might be more effective in rural/agricultural communities than in urban environments. Someone should do some kind of study on this...

I think Karnani is right when he says that entrepeurnership takes a certain level of dedication and perseverance that poorer people either don't have or don't have the resources/time to dedicate to it. And that they would be more willing to take a normal labor job for a steady amount of pay. But can't this also be said for "wealthy" people as well? Microfinance, if done properly, can identify those select individuals with good ideas and give them a chance to turn those ideas into a reality. The general idea would be that one person would have a good idea, get some money to start his business, and then maybe employ some of his friends/family to help him/her run his business. Not every single person has to be an entrepeuner (how do you spell this) in order for microfinance to work.

Karnani also says that microfinance hasn't brought the significant change that it claims. I think it is too soon to definitively say that microfinance doesn't work. I would argue that most poor people don't even know there exists such a thing, and until that changes then no one knows how effective it can be as a tool for alleviating poverty. But at the same time let's not be naive in thinking that this is a cure for poverty. As we all know, in any free-market system, you will have winners and you also will have losers. If microlending can give even a fraction of poor people a way out of poverty that they would otherwise never have had, then to me, its a success.

I am all for stronger government oversight, but in many poor countries corruption runs rampant, especially between those in power and the wealthy businessmen (usually foreign) who fund them. To me, it would be unrealistic to see an meaningful/substantial support for the poor while the CPP is still in power in Cambodia. Petitioning the government may get you some small concessions, but I think most NGOs there (they must number in the hundreds) are familiar with the difficulties in dealing with the government.

Almost equally as unrealistic is Karnani's proposal to "raise the real income of the poor by creating opportunities for steady employment at reasonable wages." Huge multinational firms locate cheap labor for a reason, and to eliminate that advantage would be to eliminate the jobs that it created.

Lastly, I think that there is a fundamental education problem that should be addressed. Those who don't understand what it means to save $, either by putting more away in savings or by cutting down existing spending, should be given the opportunity to learn; and the same goes for running a business or basic financial/family planning. Educating a workforce (not only with technical skills, but also with life skills) should be at or near the top of the list.

I probably should have organized this in some way or read it before posting but I'm going to bed instead...interesting discussion though

Jessica Lee (Jelly) said...

Wow, thank you Tim for your thorough and obviously well thought out response. I'm really glad you shared your summer's experience in Cambodia - The stories you tell are really compelling, not just high-level theorizing.

Regarding your hypothesis that microfinance may be more effective in rural communities, that makes sense to me; hence, the concept of group lending. Lending to a group, as opposed to an individual, has contributed to the low default rates we see in microfinance today. And for group lending to work, individuals within a group must live in a tight-knit community where social sanctions exist and have enforcing power. These conditions are more likely to be present in rural communities.

The rest of your points are great, especially the one on the inevitability of winners and losers in a free-market system: "If microlending can give even a fraction of poor people a way out of poverty that they would otherwise never have had, then to me, its a success." Agreed.

Education is a must. Loans to the poor need to be complemented with mentorship.

Your organization looks good to me!