PSD Blog - World Bank Group

More on the microfinance dialogue

James Surowiecki's wrote a piece in March 17 issue of the The New Yorker on how the hype around microfinance is fogging the way to development. "What poor countries need most[...]is not more microbusinesses. They need more small-to-medium-sized enterprises," writes Surowiecki. He explained further that focusing on SMEs, rather than on microbusinesses, could generate higher rates of employment. Jacqueline Novogratz from the Acumen Fund, wrote a piece in response where she gives some practitioner's insights:

"In my own experience corroborated James' findings that only a small percentage of borrowers went onto create larger businesses that employed significant numbers of people. But we've learned how to deliver at least one product to the poor, and we have an unprecedented opportunity not only to build larger businesses that employ people but also to deliver other critical products — health care, clean water, housing and alternative energy — to the poor in ways they can access and afford."

Tsunami insurance for the poor

A new health insurance plan will enable the poor in India to buy health insurance for less than 10 cents a month, and it will cover natural disasters including Tsunamis.

The new program is a partnership between and aid group, CARE International, and a private insurer, Allianz. It is expected that over 200,000 customers will buy insurance within a year. According to Allianz, the communities have been involved in designing the new policies, which will cover death, medical treatment for injuries in accidents, help with funeral and hospital expenses, as well as paying wages during illness.

"Microinsurance provides a comprehensive measure of social security in an area which desperately needs this sort of protection against accidents and shocks that can push poor communities right to the limit," said Wolfgang Jamman, national director of CARE Germany.

But don't be so quick in calling this charity work. With an estimated market of 250 million policy holders in India, there sure is a buck or two to be made.

Can the private sector teach development?

Professor William Duggan argues in his book, Strategic Intuition: The Creative Spark in Human Achievement, that disciplines such as psychology, military history, and business strategy may collectively teach strategies that could be used by development agencies in order to ensure success. He discusses this idea in depth on his blog.

Bill Easterly will join Duggan at the Center for Global Development on March 12, for a discussion on how lessons from the private sector may enhance development success.

Teaching a new dog an old trick?

Will online social investment markets replicate the flaws of traditional development models, or will they improve their effectiveness? That's the question raised in a new report that provides some empirical evidence to the so far rather anecdotal argument that we are shifting towards a Development 2.0 paradigm.

In theory, start-ups like MyC4 or GiveIndia begin from a clean slate and therefore need not fall in the same traps that hampered the effectiveness of traditional development players.

However, the analysis of 24 online social markets leads the authors to conclude that, whilst they are "relentless innovators" that succeed in attracting a new donor base, their transformative power is hindered by an all too familiar problem to "old" development players – the lack of reliable performance data and a common reporting framework.

Web 2.0 ideas for the World Bank, anyone?

A colleague down the road is collecting ideas for Web 2.0 business models and services that could be adopted by the World Bank Group. Here are some initial thoughts and there's a number of projects well on their way.

So if you have any suggestions or recommendations help brainstorming and leave a comment below. (By the way, if you happen to be a developer, you might want to move from thought to action at the Social Innovation Camp in April).

Where does the aid go?

If you believe that a picture is worth a thousand words, this interactive aid map is for you.

Smart farming in Africa

[…] telling farmers to grow more is not enough; even giving them the freedom to sell to whomever they wish is not enough. Farmers need cash buyers. Without willing customers, paradoxically, growing more food can grievously hurt farmers—it raises costs and saddles them with worthless surpluses

G. Pascal Zachary has written an excellent piece in the Wilson Quarterly recounting the evolution of farming on the continent since the 1960s.

Aid effectiveness

From Tim Harford, the co-father of this blog, a proponent of randomization and the author of a brand new book "The Logic of Life":

If development agencies focus on pouring concrete, they may be spending money on infrastructure that will never be used—and perhaps never even be built—because of corruption in the background.

But if they focus on the broader stuff—democracy, corruption, human rights—they risk trying to do everything and in fact achieving nothing.

Experiments in malaria prevention

Does raising the price of long lasting anti-malarial insecticide-treated nets (ITNs) from $0 to a $0.75 kill the demand? At least in theory, cost sharing can help reduce wastefulness and save money without serious adverse effects of healthcare of most people.

Based on a field experiment in Kenya, a new paper explores the effects that cost sharing of the price of ITNs charged to pregnant women had on infant mortality.

Big thoughts on BigThink

Dubbed "YouTube for ideas," BigThink - the brain child of Peter Hopkins with backing from Larry Summers - is a place where leading public intellectuals answer questions asked by an unseen interviewer.

For a starter see Bill Easterly opine on Jeffrey Sachs' approach to aid.

Africa and the oil price

From the FT:

Surveying 13 non-oil-producing African countries, including South Africa, Ghana, Tanzania, Ethiopia and Senegal, the [International Energy Agency] found that the increase in the cost of oil bought by the countries since 2004 was equivalent to 3 per cent of combined GDP.

This was more than the sum of debt relief and aid received over the past three years by the countries, which have a combined population of 270m, of whom 104m live on less than $1 a day.

Can private sector save the UN?

John Holmes, the UN's top aid official, will include private companies in his search for contributions in an effort to close an estimated $3.8 billion gap in funding.

But building the relationship between the UN and business still has a long way to go.

Will Africa miss all MDGs?

It seems more and more likely each year that Sub-Saharan Africa will fail to reach any of the MDGs by 2015.  But it won't be the region's fault, says Bill Easterly in his new paper, but rather of those who set these goals.

Improve the practice of business environment reform - be a (constructive) critic

Informally existing since 1978, the Donor Committee for Enterprise Development (DCED) is a group of donors and inter-governmental agencies who share our mantra: sustainable poverty alleviation through development of the private sector. IFC co-chairs this 45-member-strong Committee.

Throughout last year, the Committee has been working on the "Donor Guidance on Supporting Business Environment Reform" – a practical guide for staff of development agencies to help them do a better job improving business environment around the world.

Now that's the 30-pager is almost ready, the Committee counts on you for constructive feedback before sending it to the publisher. Bring out the Bill Easterly in you and email your comments about the content and usefulness of this guide to Simon White (simon@blueprintgoup.co.za) and Andrei Mikhnev (amikhnev@worldbank.org) by December 21, 2007. More info on their blog.

New breed of NGOs

Africa has been experiencing a period of strong growth, but problems such as AIDS, corruption or insufficient infrastructure still undermine development.

A panel at Wharton discusses the way new high-profile NGOs are filling the gap between inadequate government programs and the shortcomings of traditional aid.

Solutions for poverty: between the left and the right

Paul Collier, the author of the "Bottom Billion," sums up both sides of the development spectrum:

At present, the clarion call for the left is Jeffrey Sachs' book "The End of Poverty." Much as I agree with Sachs' passionate call to action, I think that he has overplayed the importance of aid. Aid alone will not solve the problems of the bottom billion. We need to use a wider range of policies.

At present, the clarion call for the right is economist William Easterly's book "The White Man's Burden." Easterly is right to mock the delusions of the aid lobby. But just as Sachs exaggerates the payoff to aid, Easterly exaggerates the downside and again neglects the scope for other policies. We are not as impotent and ignorant as Easterly seems to think.

Bad news for the poorest of the poor

The authors of a new report at the International Food Policy Research Institute estimate that the world will reach the first MDG (halving the proportion of people living on less than $1 a day and suffering from hunger) by 2015. The bad news is that the ultrapoor – those surviving on less than $0.54 a day - are the most likely to remain among at least 800 million people still in poverty by 2015.

The report points to the three main poverty traps: inability to invest in education; limited access to credit for those with few assets; and reduced productivity due to malnutrition. 

Three-quarters out of 162 million untrapoor today live in Sub-Saharan Africa.

MDGs: a new picture

With the countdown half-way through, the data on the Millennium Development Goals are finally available via interactive maps. The timeline feature (step 3 on the map) tracks progress on any of the eight goals, throughout 189 countries.

Poverty and its discontents

While nearly 1 billion people still live on less than $1 a day, according to World Bank estimates the incidence of poverty shrunk from 29 percent of global population to 18 percent between 1990 and 2004.

Naturally, there is more than one way to measure poverty, keeping the numbers debate alive. The newest challenge comes from Sanjay Reddy and Camelia Minoiu who ask if the world poverty has really fallen (hat tip to New Economist).

See also the new poverty maps - an effort to understand local conditions in cities, towns and villages normally hidden behind aggregate national indicators.

Bhagwati on Sachs, Easterly and aid

Question: What do you think about professor Jeffrey Sachs' argument for a dramatic increase in foreign aid? Do you side with William Easterly in the debate?

Answer: My reaction is: plague on both your houses! […] I doubt professor Sachs ever pays attention to [...] sophisticated objections, always dismissing those who raise them as if they were wicked conservatives with horns and no brains. But Easterly is equally wrong in arguing that aid hardly works.

The full interview with Mr. Bhagwati is here.

Profitable microfinance and its spillovers

What has very low default rates, relatively high administrative costs and high interest rates? The answer is: microfinance loans.

Despite the unfavorable expense ratios relative to commercial banks – the cost of lending one dollar is below four cents for a traditional bank compared with at least 10, and in some cases over 20 cents, for microlenders - microfinance institutions (MFIs) are beginning to attract serious money.

Though not without its critics, the recent success stories strengthened the credibility of microfinance as an "investment grade" asset class in commercial capital markets. Capital from a growing number of private equity, hedge funds and big banks, including ICICI, ABN Amro and Citibank, has been helping supplement limited funding from donors and foundations.

More investment has already expanded the industry. Maria Otero, the president of ACCION International – an investor and lender to MFIs said that "it took 20 years to win [the] first million clients, but only three years to obtain [a] second million."

Muhammad Yunus challenges Compartamos bank

Is it ok to make a big profit from lending to the poor? Where does microcredit end and loan sharking begin?

Carlos Danel and Carlos Labarthe, the CEOs of Compartamos, a nonprofit-cum-commercial bank which charges an annual interest rate of nearly 100 percent, believe that only the lure of profits will motivate people to lend to the poor. Today Compartamos reaches 700,000 borrowers and 88 percent of its clients come back for more loans.  In 2006, it was rated as Mexico's most profitable bank.

Muhammad Yunus, the Nobel laureate who pioneered the movement three decades ago and has made loans to some 7 million borrowers in Bangladesh, disagrees. Poor people's willingness to pay high interest is not a justification for charging it, he says.  Compartamos is not microcredit, it's "raking in money off poor people desperate for cash."

What do you think? The comments are open. The entire program is available here.

Aid the precarious

Aid is proven to be more volatile than fiscal revenues, particularly in highly aid-dependent countries; shortfalls in aid and domestic revenue tend to coincide. Pierre-Richard Agénor and Joshua Aizenman in a highly theoretical paper analyze the impact of this unpredictability:

[Aid] may not only potentially exacerbate the impact of macroeconomic shocks […], but it may also contribute to the emergence, or persistence, of a poverty and low-output trap if aid exerts productive effects–either directly (because donors commit to certain projects) or through its impact on public spending.

What's wrong with Africa by Andrew Mwenda

The problem with the African continent and the problem with the aid industry is that is has distorted the structure of incentives facing the governments in Africa. The productive margin in our government search for revenue does not lie in the domestic economy. It lies with international donors. Rather than sit with Ugandan entrepreneurs, Guinean business, South African enterprising leaders, our governments find it more productive to talk to the IMF and the World Bank.

Aid increases the resources available to the governments. And that makes working in government a most profitable thing you can have as a person in Africa seeking a career.

The most enterprising people in Africa cannot find opportunities to trade and work in the private sector because the institutional and policy environment is hostile to business. So the most enterprising Africans end up going to work for the government.

There's more - 17 minutes of video to be exact - in which Mr. Mwenda shares his insights. Definitely worth the time.

With the deadline on September 30

PSP-One – a program to increase provision of health services by private sector in developing countries - seeks submissions for their upcoming online conference: "social marketing in the developing world." The nine topics range from HIV/AIDS to public/private partnerships and serving the customers at the bottom of the pyramid.

The end of September marks also the closing date for submissions to the IFC – FT Essay competition. The two new jurors are Ngozi Okonjo-Iweala, former Minister of Foreign Affairs of Nigeria and Ernesto Zedillo, former President of Mexico. The main prize includes $20,000 and a chance to make a difference.

World Bank's Internal Evaluation Report is out now

Since the mid-1990s, 86 middle-income countries (MICs), defined as having GDP per capital ranging from $1000 to $6000, have borrowed the total of $163 billion and their average real incomes grew by 4 percent a year. Given their new wealth should the bank continue lending to them or focus exclusively on low-income countries?

The Internal Evaluation Group's new report evaluates the effectiveness of bank's programs to MICs from 1995 to 2006 and recommends the way forward. The two key recommendations are: continue lending but depart from business as usual.

See also what The Economist wrote about the group of countries that despite the impressive growth are still home to over one-third of the world's poor.

Learning from corruption

Across infrastructure as a whole, governments and donors still account for around four-fifths of sector investment. In a new World Bank paper, Charles Kenny compiles experiences from over 20 years in reducing the development impact of corruption in the field in the areas of regulation, state-owned enterprise reform, planning and budgeting and project design.

Lesson one: "Anti-corruption measures, much like other regulation designed to minimize market or government failure, can carry higher costs than the economic benefit of the reduced corruption with which they are associated."

Easy vs. effective aid part II

Should we get rid of TRIPs? Arvind Subramanian clarifies his view after Dani Rodrik and Nancy Birdsdall respond to his last post.

Improving aid: consensus or competition?

The aid community has undergone sweeping changes since the 1960s when the number of donors per recipient country averaged at 12. Today this figure is 33 and the number of organizations exceeds 230.

The multitude of donor-driven initiatives spurred efforts to streamline aid, such as Poverty Reduction Strategies (PRS), but with little success. Most middle-income countries, home to 80 percent of the developing world's population, opted out of PRS and new emerging donors China and India, with $2 and $1 billion contributions respectively, change the nature of global aid.

It's now easier than ever to borrow from capital markets – 90 percent of the world's developing countries accessed the syndicated loan market and 40 percent issued sovereign bonds. As a result, the World Bank revised its lending policies cutting fees and raising lending limits striving to compete with other development banks.

For the "road ahead" read a very good short study by Joseph O'Keefe, the former head of corporate relations at IFC, and now a scholar at Brookings.

MDGs at mid-point

The UN recently updated the Millennium Development Goals data. See the progress chart - 1990 is used as baseline.

The World Bank adopted all 8 goals in 2000.

Microcredit the dangerous

The September issue of Harvard Business Review reminds companies why not to treat microcredit as a foolproof poverty solution:

From a humanitarian perspective, donating to ineffective microcredit programs slows the growth and threatens the sustainability of the best programs. From a corporate public relations perspective, companies that make low-value or even harmful microcredit investments risk being attacked for unsubstantiated claims about the impact of their CSR activities. [And] now they may get bad press for "poverty washing."

The article is free only for one month.

Easy vs. effective aid - don't give in to distractions

When Ms. Jolie appears on the screen calling for more aid, she not only distracts our attention toward her obviously good looks, she may also be distracting our attention away from the search for more effective solutions to helping the poorest around the world.

Arvind Subramanian explains that many celebrities "aren't up on the economic literature":

Aid, especially in large amounts, can damage governance and make an economy uncompetitive. […] When foreign resources come pouring in and are spent domestically, wages tend to rise, especially for those in scarce supply such as managers, supervisors and entrepreneurs. Factories that export will find themselves becoming uncompetitive and go out of business.

Calling out poverty with mobile phones

[..] not only can such technologies increase earnings, but those increased earnings […], in turn, can be expected to lead to improvements in health and education. In addition, because mobile phones in Kerala are a private sector initiative rather than a development project, other than through perhaps raising interest rates for capital, they do not crowd out investments in other projects. Also unlike most development projects, the service is self-sustaining; mobile phone companies provide service because it is profitable to do so, and fishermen are willing to pay for mobile phones because of the increased profits they receive.

In the Quarterly Journal of Economics Robert Jensen provides evidence for why the provision of information technology - mobile service in this case - ought to be a priority, especially for low-income countries.

Foreign aid by Nicholas Kristof

Look, it's true that aid doesn't always work -- any more than other projects do. We spend billions on our military, yet it doesn't always succeed. But the lesson should be to deploy military power more wisely, not to give up on it.

From the New York Times [subscription required].

Cash transfer scheme for Uganda's poor

Thirty-nine percent of Ugandans live in poverty. According to 2002 census, 1.6 million of people are over 60 years old and more than 2.6 million are orphans.

In a drive to eradicate poverty, the Ugandan government announced it would pay $10 per month to "chronically poor." Though the government still needs to determine eligibility criteria for this mainly foreign aid-backed program, John Ssebaana Kizito, the leader of the Democratic Party, who calls for employment creation and skills training as the best way to help the needy, fears corruption will undermine the effort:

In our society, the elderly depend on the younger ones. But what is happening today in Uganda is that the younger generation, who would have helped the aged, have no jobs and the agriculture they used to rely on doesn't exist

Money: best when left to women

Although conditional cash transfer programs have shown positive effects in many areas, including school enrollment and child health, households' compliance with program conditions is costly for both the households and the programs, which have to monitor their compliance.

A new World Bank study finds that the gender of recipients does make a difference.

Microfinance debate

The recent investment by IFC, the Netherlands Development Finance Company and Deutsche Bank in Aasishkaar Goodwell, a private equity company supporting microfinance organizations in India, will create of almost 60 greenfield microfinance institutions to serve a potential client base in India of nearly 75 million households.

But is microfinance the right tool for development? Aneel Karnani from the University of Michigan says no:

There is no developed country that has developed on the basis of microenterprises. All developed countries have larger enterprises (which, as I have emphasised, includes small and medium sized enterprises). Scale economies play a critical role in increasing productivity, which is the foundation of economic development.

P&G finds fortune at the bottom of the pyramid

Unlike in the U.S. market where large stores dominate, individual retailers in small kiosks and stalls, which shoppers visit several times throughout a day, prevail in developing markets.

These high-frequency stores, as Procter & Gamble calls them, according to a Wall Street Journal article [subscription required] are the company's largest customer, with Wal-Mart coming in second, accounting for $20 billion in sales.

P&G estimates that only 2.5 million out of 20 million high-frequency stores sell their products:

Mexico has 620,000 high-frequency stores. In most villages and cities there is one approximately every one-and-a-half blocks. Though the average shopper spends just 23 pesos, or $2.14, a day in high-frequency stores, annual sales total about $16 billion.

P&G created its own business strategy for the BOP market:

GAAP for governments

Clare Lockhart, the founder of the Institute of State Effectiveness, calls, in an FT article for remodeling of government financial management system to resemble the private sector model:

The World Bank and its partners should turn their focus from corruption within World Bank-funded projects to financial systems as a whole.

The mechanism would be simple. States would be required to publish online an annual report setting out their income and expenditure, provide a balance sheet of assets and liabilities and outline which public assets had been sold to whom, at what price and through what process.

Unless state resources are firmly evaluated and monitored we should not be surprised if […] developing countries are subject to Enron-type collapse.

Ms. Lockhart and Ashraf Ghani, the former finance minister of Afghanistan, are the authors of a forthcoming book "The Framework: Fixing Failed States."

Bad aid makes things worse in Sahel

Why has development been unable to break the cycle of poverty in one of the poorest and environmentally damaged regions in Africa? Flawed aid, says a new report:

The short-term nature of many contracts in international development makes it difficult for staff members to develop profound and detailed understanding of the situation, and the management systems in development agencies do not demand such understanding.

Many aid initiatives are based on the shallow analyses […] and are almost always driven by externally imposed ideas of development. Notwithstanding the lip service paid to " participation", the majority of aid organizations develop their programmes on the basis of their own priorities and their own visions. In most cases there is an external analysis of what local people lack, and plans are designed to address this lack.

Effective grants – what worked and what didn't

The Center for Global Development analyzed 140 programs funded and evaluated by the Global Fund to Fight AIDS, Tuberculosis and Malaria:

Programs implemented by civil society and private sector recipients receive higher scores than those implemented by the government.

The full article is here.