Sustainable Economic Growth VS Sustained Economic growth

Making lives of poor people better is not the same as fighting poverty. Many aid projects in Africa have been built for sustainability but are rarely sustained once the project timeline ends.   Thus the difference between investing in the productive capacity of the poorest and providing the economic benefits of development to the poorest. If the project designed invests directly in the community’s capacity then the project itself becomes apart of the way of life and will therefore be sustained. Giving away goods that the poor need may alleviate some of the hardships of poverty but it does little to build an stronger and sustainable economy.

The gains that this model of aid creates are real, but rarely outlive the project’s timeline. As aid workers leave the village life quickly returns to what is was before.  Water wells dug by well meaning NGO’s run dry for lack of spare parts, and clean burning cook stoves sit in the corners of huts unused.

Dani Rodrik points out that one of the main factors slowing the anti-poverty fight in Africa is the slow growth of the manufacturing sector.  Rapid and sustained growth which leads to the higher incomes and thus anti-poverty policies is achieved on the back of industrialization.  In Africa, manufacturing is still around 10.1% of annual output. For comparison,  Thailand is about 34% South Korea is 31%.  Making matters worse, manufacturing in Africa has actually been on the decline over the last 40 years, so what we are seeing is are not slow gains but declines of the manufacturing sector.

Asking Africa’s poor to be entrepreneurial with high interest micro loans and building their way out of poverty as a national policy will not work.  Development agencies and African politicians may preach about technological leaps that the African countries can make and while that is largely true, sustained growth and reduction of poverty will only come when Africa’s poor have access to higher paying jobs.  This means that the 70% of Africans citizens that depend on subsistence farming need the means to transition to the higher paying manufacturing economy.

Investments in education and human capital are beginning to lay the ground work for an investment friendly environment however.  Hopefully, African politicians will begin focusing on mass job creation and less on “pro-poor” policies.  Just remember making the lives of poor people better is a noble cause…but it’s not the same as fighting poverty.

Microfinance: The Good, The Bad, The Macro

   Microcredit is money lending reinvented for a social purpose, and it has taken the development world by storm. People praise it for being able to keep interest rates low and by removing some unsavory elements of traditional lending such as India’s use of hooligans to collect payments or the multiplier effect which negatively impacts both lender and borrower. It has certainly had some success but how much and its overall impact is the subject of some debate.

Typically micro-loans involve loans to a group of borrowers who are liable for each other’s loans and hence have a reason to make sure each other pay.  Some organizations expect borrowers to know each other when they come to pay, others hold weekly meetings.  The very act of bringing the borrowers together helps to build a group mentality and makes them more willing to help out a group member who faces difficulty. Unlike traditional moneylenders their policy is to never use physical violence, but the power of shame seems powerful enough.

Where MFI differ from other loans is that they remove almost all flexibility. Moneylenders allow borrowers to decide how they repay their debt…some pay once a week, some twice a month some just pay the interest until the are able to put more money down.  MFI’s has to repay a fixed amount every week at a time and place designated by the group.  The biggest advantage to this is that the collector has a much easier time getting all his/her payments.  The loan officer simply has to look and see if they have enough from this particular group and then move on to the next.  This allows the loan officer to collect from 100 to 200 groups a day and not wait around to see if the might get paid.  Furthermore, the officer doesn’t need to be particularly educated or trained, both of which help keep costs down.  Keeping costs down reduces the risk of the multiplier effect and makes lending to the poor possible.

It’s a good plan but whether or not it works depends on your definition of “work.” Defenders of MFI say it transforms lives. The Consultative Group to Assist the Poor (CGAP), an organization that promotes micro-credit at the World Bank states, ” there is mounting evidence to show that MFI can help reach the MDG’s.”

Despite their claims there’s actually very little evidence to support the impact of MFI’s largely due to their own reluctance to gather data.  Most of their data is anecdotal arguing, “as long as clients keep coming back, the loans must be helping them.” Maybe….but how much? 

Others argue that because MFI’s are financially sustainable evaluating them is unnecessary.  This disingenuous because most MFI’s are sponsored by donors and the generosity of their staff based on the idea that MFI’s are better than other ways to help the world’s poor.

So why haven’t micro-loans taken off? One possible reason is the inherent tension between entrepreneurship and the stringent rules of MFI’s.  While they can boast of a “zero-defaut” they may not be attracting the right people.  Small business owners are expected to take risks and sometimes fail, whereas MFI’s do not tolerate failure.  In short, micro-finance incentives playing it safe so it isn’t well suited to seek out those who thrive on risk seeking.

Singularity and the End of Poverty

  In his book The End of Poverty, Jeffrey Sachs discusses the global poor and how to eliminate poverty within a generation.  The idea is that global poverty, described as those who live on less than a dollar a day, could be eliminated by the year 2025 with the careful use of development and aid.  He describes the problem as a poverty trap in which the global poor are unable to reach the “bottom rung” of the economic ladder; once that rung is reached a country and a people could pull themselves out of poverty and into the market economy.  The dilemma that Sachs attempts to tackle is how to boost the world’s poor to reach that rung.

Economists love simple theories and the poverty trap is no exception.  The mechanics of it are very straight forward…your income today influences your income in the future. What you have today directly impacts the food you can buy, the medicine you can buy, what you can invest in your children’s education, the seeds you can buy to grow more food these are all determined by current income and thus determine what you will have tomorrow. If you cannot buy enough fertilizer to improve your crops, generate more income, and increase spending power you are trapped in poverty.  Imagine the game “Shoots and Ladders”, but every ladder leads directly to a shoot.   To deal with the poverty trap dilemma Sachs advocated for a clinical economics stating that countries like people require a unique diagnosis to treat poverty.

I am not entirely convinced that the poverty trap exists as I don’t typically put stock in the rational actor model, which is implied by the poverty trap for reasons I will not address here but is discussed in the book Poor Economics.  However, for the sake of argument lets say that it does exist and the world’s poor really do need a boost to get out of poverty.  Enter the singularity…

In math and physics the “singularity” means something not behaving as it did, but instead growing by leaps and bounds.  It is the threshold in the predictability of human development where past and present models can no longer be used to give reliable descriptions of the future due to the creation of a strong A.I. or enhancement of human intelligence.

Sound to outlandish? The expanse of technology is exponential as each piece builds upon the advances of the last. Think about the advance of technology in your own life. In the 1969 the U.S. put a man on the moon and one of the biggest expenses was being able to fit a computer into one room, forty years later your iPhone is thousands of times more powerful and at a fraction of the price. Not to mention it fits in your pocket.  It’s not unreasonable to think that the iPhone 20 will be the size of a red blood cell, connect to a new internet we haven’t imagined and cost 50 dollars. This is also known as Moore’s Law.

So whats this got to do with macroeconomics and the global poor? Simple. This is the next technical frontier that represents a post industrial economy.  Nanotechnology represents the ability to make things very cheaply. Nanotech could produce food, building materials and fuel without the energy intense process of the Industrial Revolution because it builds on an atomic level, thus, is the best form of recycling.  Give me your tired, your poor. Your broken and used molecules yearning to be free…and I’ll make you a house and a hamburger.

In short the singularity allows the global poor to climb out of poverty traps that Sachs mentioned because food, shelter, clothing and medicine will be no cost.  In the post industrial economy the productivity (GDP/hoursworked) is hugely greater  because technology has radically reshaped our global society.