Creating a Sustainable Future
Aid – Investing in the Poor
Low-income and poor communities can improve when large firms and multinational corporations provide quality goods and services. These may have to be adapted, often quite radically, to meet specific requirements, including hostile environments where only limited resources are available. As an example PRODEM has introduced smart Automated Teller Machines (ATMs) in Bolivia that speak three local languages, providing high-quality financial services to illiterate customers.
By providing opportunities to local people, companies encourage villages to become more self-reliant. The Bank of Mandura, for example, set up self-help groups in southern India as a way of expanding its customer base. The bank teaches these groups how to hold meetings, keep records, etc., so that they can become responsible for all financial transactions with the bank. The number self-help groups increased to 10,000 and served 200,000 families, and with the default rate on loans less than 1 percent, led to the bank’s merger with the Indian multinational Bank ICICI.
Prices have to come down dramatically to be affordable for low-income consumers. ICICI Bank in India is a corporation which provides financial services at a fraction of the cost of its competitors. It does this by lowering its administrative costs, serving 200,000 poor customers with only 16 managers. The bank grants loans to qualified self-help groups who in turn loan money to individuals and are responsible for repayment. In this way customers gain access to cheap, reliable capital and the bank makes a profit.
Since the poor tend to buy only what they need for the day, single-serve packaging has become very popular. Amul sells good quality ice cream in India for 5 cents a serving. The size of the Indian shampoo market is as large as the US market and Proctor & Gamble has started selling one of its high-end shampoo products in a single-serving sachet.
An estimated 12 million people are blind in India, the vast majority of them from cataracts. Aravind Eye Care performs high-quality cataract surgery for $50 to $300, and sixty percent of their customers pay nothing at all. They have designed a protocol using specially designed hospitals so that only one doctor and two technicians can perform over 50 surgeries per day. In order to adequately help the poor they were obliged to provide a permanent presence in rural areas, establishing 36 storefront vision centers staffed by rural women recruited and trained by Aravind. Using cameras, doctors are able to do eye examinations remotely. In 1992, Aravind set up Aurolab, which now manufactures sutures, medicines and lenses (for $2 apiece). It is now a major global supplier of intraocular lenses and has driven down the price of lenses made by other manufacturers.
Access to distribution networks is still a challenge for the rural poor, but there are ways around it. In 1993, 320,000 Avon Ladies worked throughout Brazil, more than 60,000 of them in the Amazon.
It’s essential for large firms to build trust between themselves and poor communities if they are to be successful. Companies whose personnel interact with their customers do better than those that outsource their delivery process. Bimbo, the largest provider of bakery products in Mexico, has developed such a high level of trust with it customers that its truck drivers often deliver their products and collect money without supervision. All Bimbo managers have to work as truck drivers first, so that they better understand their customers and can act as ambassadors for their company.
A market-based ecosystem provides a framework for a variety of groups to work together provided they have the flexibility to adapt to changing circumstances as they strive for increased efficiency. Hindustan Level Ltd. (HLL) is an ecosystem consisting of manufacturing plants, suppliers, distributors, wholesalers, retailers, and direct distributors. It also works with state governments to promote local farm products and provides access to global markets, establishing mutual obligations, and setting quality standards and ensuring a shared vision. According to the CDC diarrhea kills more children than malaria, measles, and AIDS combined. Simply teaching children in southern India to wash their hands with soap before eating can help to prevent childhood deaths from diarrhea. HLL had to work with state governments, NGOs, and the World Bank to create and implement a simple demonstration for schoolchildren to show that clean-looking hands can still contain harmful germs, which cause disease. They found that as children learn about better hygiene they pass this information on to their parents.
Too often the poor are unable to produce enough to subsist on, let alone have enough to live on. Low productivity means that there is no money to invest in those things that could increase output. Banks will not lend even the small amounts required to invest in the means to increase productivity because those on such low incomes can provide no security against the loan. The only money available is often from local moneylenders who charge exceptionally high interest rates that only make the situation worse.
In 1974, Professor Muhammad Yunus, a Bangladeshi economist from Chittagong University, sparked the beginning of a worldwide movement by lending $27 from his own pocket to 42 poor basket weavers. He subsequently set up the Grameen Bank to provide small loans to the poor at low interest. Microfinancing now provides over 11 million women around the world with the microloans they need to help start or improve a small business, provide for their families and escape the cycle of poverty.
At every branch of Grameen Bank, the borrowers recite Sixteen Decisions and vow to follow them. Possibly the most important one is agreeing to educate their children by sending them to school. Since the Sixteen Decisions were incorporated, almost all Grameen borrowers have their school-age children enrolled in regular classes. This in turn helps bring about social change, and educate the next generation.
Solidarity lending is a cornerstone of microcredit, and the success of the Grameen model has encouraged the growth of many more microfinance institutions in Latin America, Africa and Asia such as Kiva and PRODEM (later Banco Sol). The Grameen system is now used in more than 43 countries. Although each borrower must belong to a five-member group, repayment responsibility rests solely on the individual borrower. The group and the center oversee that everyone behaves responsibly and none gets into a repayment problem. In practice the group members often contribute any defaulted amount with an intention to collect the money from the defaulted member at a later time. Such behavior is encouraged because Grameen does not extend further credit to a group in which a member defaults.
For people in extreme poverty, microcredit is not an option because they are unable to handle the demands of repaying a loan. For them, an alternative we’ve already mentioned is to provide them with a few farm animals, a small stipend and some training in tending the livestock and managing their household budget. Randomly chosen families participated in such a program run by Bandhan, an Indian microfinance institution. It was found that that families were eating 15% more, earning 20% more, and saving more money than comparison groups, long after the financial assistance ended. These results were so much better than expected that they could not be directly attributed just to the grants. Researchers concluded that the program had cut the rate of depression so sharply that beneficiaries were more optimistic, began working harder and started looking for new opportunities to improve their lives. Giving people hope helped them break out of poverty.
As Easterly says, aid involves “systems that nobody designed, that display order that nobody ordered, and that deliver outcomes that nobody intended.” Today much economic growth happens through technological innovation, which cannot be planned or predicted. It takes many individuals trying many different things to find the best way of doing things, and no one knows in advance which solutions will be successful. The invention of the cell phone is perhaps the best recent example. Today a farmer can take a photograph of a diseased crop, send it to a lab hundreds of miles away, and receive expert advice. Before cell phones African farmers and fishermen had to travel from market to market or lose money to a middleman. Now these producers of high-end coffee and cut flowers are linked to the world themselves, they can call around from their boats or fields to different markets and get the best price, and use their cell phones to transfer money instead of using inefficient banks.
Easterly’s finding asserts that "Technology is a principal determinant of income per capita." Poor countries that provide individuals with incentives to innovate can catch up by adopting new technologies. Governments have begun to use information technology to provide better access to information and make transactions transparent. For example, things changed dramatically once the government of the Indian state of Andhra Pradesh in collaboration with the private sector, provided better access to its services by using the Internet. A semiliterate farmer previously had to go through a broker to register his land. The land registration process now takes one hour, instead of seven to fourteen days; title searches take fifteen minutes, instead of three days; and the system calculates the price of land based on fair market value, instead of arbitrary assessment.
Andhra Pradesh have made over 45 government services available to the public in this manner. It used to take at least half a day to go to the Electric Department to pay the monthly electric bill. Now people can conduct all of their transactions at one time at nearby kiosks without having to pay “speed money.” The system records each transaction to prevent corruption and, for the first time, citizens receive the same level of service regardless of their economic class.
The Center for Good Governance has been set up to monitor the system in Andhra Pradesh. It publishes reports and makes recommendations on what needs to be changed and has established a performance monitoring system which evaluates government officials. The Chief Minister holds a monthly teleconference with more than a thousand government employees as well as the press. District administrators must explain negative trends and what actions they are taking to improve the situation. This level of transparency is forcing government officials to focus on what is important to the citizens in their district.
Again, bringing telephone services to the rural poor makes a huge difference all over the world. Grameen provides one borrower in each village with a cell phone. These “telephone ladies” earn a substantial living by selling the telephone service to other villagers enabling everyone to connect with the world, conduct business over the phone instead of sending a messenger, and to stay in touch with families and friends.