By Rick Ifland ’83, Director of the Eaton Program for Entrepreneurship and Innovation at Westmont
To paraphrase Austrian economist Freidrich Hayek, acting on the belief that we possess the knowledge and the power to shape the economy to our liking when we lack such knowledge and power can lead us to do much harm. In the social sciences, the erroneous belief that exercising top-down political power could exert universal beneficial consequences will likely only create new power to coerce.
Poverty is a case in point—it remains an acute and seemingly intractable problem. Listing some statistics, defining terms and pragmatically reviewing recent history offer a framework for addressing the problem of poverty. About seven billion people live on Earth. Americans are comfortably nestled in the top echelon of one billion people, along with other G20 countries. Our collective 15 percent of the population retains 60 percent of the wealth. The middle five billion are catching up to us when measured by GDP growth, yet the bottom two billion in this middle group still earn less than $2 a day. Finally, a billion people live on less than $1 a day. They reside in 58 countries, eight of which are categorized as failing states. Ironically, the myriad top-down approaches to alleviate poverty and inequality come from the people—leaders of the G20 nations—who suffer little and understand the problem even less. As E.E. Schattschneider notes, the flaw in the poverty-eradication heaven is that the heavenly chorus sings with a strong upper-class accent.
A simple definition of globalism involves three interrelated outcomes: the trade of goods, the migration of people and the flow of funds. Some people are able to participate fully in these activities and others very little.
Historically, virtually no economic growth occurred during the agrarian years from 700 to 1750. Most people grew their food and lived on less than $1 a day. Then the Industrial Revolution began. From 1750 to 1950, world economies rapidly diverged. Growth started in England and spread to the rest of Europe and the United States, Canada, Australia and New Zealand, which all grew at roughly 2 percent a year. Over a span of 200 years, this fairly modest growth created a significant advantage compared to economies that remained stagnant.
Modern growth isn’t a replay—or even a faster version—of earlier episodes, yet in many places significant growth has occurred. Since 1950, some countries are catching up economically (convergence), and globalism has expanded. But the results are uneven, and each country—and continent—has followed its own path. For instance, in 1950, North and South Korea were roughly equivalent economically. Today, North Koreans earn about $473 per capita while South Koreans earn $20,000 per capita. In 1978, per capita income in China was $400; today it’s about $3,500. India is a bit behind China, but not much. In 1960, Singapore was a little fishing village where the average person earned $427 per year. It’s now one of the world’s leading ports and financial centers with per capita income of $38,000, making it one of the richest countries in the world. Despite the fact that Africa possesses more natural resources than Asia, numerous countries in Asia have grown significantly while African countries contain most of the population in the bottom billion. What happened? Asia engaged a global community and invested in and educated its people. Many African countries didn’t and are now finding that running a 21st century economy under rules from the 1940s isn’t effective.
Since growth isn’t consistently applied to all economies, how do we solve these problems of poverty and economic divergence for the bottom billion? Three schools of thought offer differing solutions. Jeffrey Sachs, director of the Earth Institute at Columbia University, takes a top-down approach, the kind Hayek warns against. A prolific author and adviser to two UN secretaries general, Sachs is a former director of the Millennium Development Goals, which identified eight global problems he said could be significantly reduced or eradicated by 2015. Despite outlandish claims and broad global support, progress has stalled and top-down solutions have yielded significant weaknesses and poor results. Critics, and even some advocates, have begun to notice its limitations. Sachs seemingly prefers clever maneuvers to constructive contributions and occasionally employs complex statistics to make unremarkable points. Perhaps a form of drift occurs when an enacted policy fails to keep up with changing circumstances and falls short of—or even subverts—its intended goal. Whatever the conclusion, this top-down approach is under scrutiny for good reason.
Sachs’ polar opposite is William Easterly, a professor at New York University and senior fellow at the Center for Global Development. This former research economist at the World Bank espouses a bottom-up approach. Easterly punctures the view of top-down effectiveness by claiming poor people die for two reasons: indifference by most (who don’t seem to care), and ineffectiveness by few (who do seem to care). Easterly states that the West has spent $2.3 trillion in a 50-year span (roughly 1960-2010) on top-down programs, yet three billion people still live on less than $2 a day. How can that be? Because the top-down approach can’t seem to get 12-cent malaria vaccines to those most in need; malaria leads to 50 percent of the childhood deaths in some areas. Easterly finds this example—and many others—unacceptable given our knowledge and resources. He criticizes planners like Sachs, who write optimistic books and proposals about big plans with good intentions yet fail miserably in executing the plan at the ground level due to a burgeoning bureaucracy and almost total lack of accountability.
The Millennium Development Goals (MDGS), Easterly claims, are the poster child for ineptitude in the top-down, governmental approach. MDGs include eight objectives, including the eradication of poverty. The plan includes 449 interventions by governments; not surprisingly, implementation has fallen behind. Six UN agencies work on the projects and the World Bank, the International Monetary Fund and USAID are involved, yet they don’t coordinate efforts. Nine layers of bureaucracy tackle the goals. The result? Everyone’s file on his or her respective desk might be in order, but little gets done. So reports claim success, but the problems persist. Meanwhile, in this project and others, we have spent $2.3 trillion and have little to show for it. With a top-down approach, there’s little to no local support and almost no information about where the money was spent or how many people were helped. Further, those in charge of helping are seldom seen on the ground where the most persistent problems occur.
Easterly concludes that the top-down approach simply doesn’t work. His solution? Unlike most critics who are long on diagnosis and short on treatment, he thinks the poor can search out, identify and address their own needs. Top-down plans often lack feedback from the people at the bottom they’re attempting to help, and they don’t hold the people in charge accountable. Although small interventions always seem puny compared to grand visions, Easterly claims they often achieve more than the planners and their massive yet ineffective budgets.
Nestled in the middle of these two extremes is Paul Collier, a professor of economics at Oxford who previously served as a director at the World Bank. Collier forensically reconstructs the problem of poverty. Drawing on his empirically driven research, he has identified four traps that keep people in the bottom billion: the Conflict Trap, the Natural Resources Trap, the Landlocked with Bad Neighbors Trap, and the Bad Government Trap.
Collier’s research shows that the Conflict Trap—like a civil war—affects 73 percent of the people in the bottom billion. It results in low income, slow growth and often dependency on a primary commodity. These 58 countries have a 14 percent chance of experiencing a civil war in the next five years. Not surprisingly, conflict creates negative growth of more than 2 percent per year. Since the average civil war lasts seven years, a typical conflict pushes a nation backwards economically by 15 percent, a difficult circumstance that takes years to overcome.
The Natural Resource Trap involves 29 percent of the bottom billion. When a country depends on a single resource to lift people out of poverty, the money most often benefits the people at the top of the government instead of spreading throughout the economy because the government controls the resource. To dominate policymaking with little opposition, a multi-national corporation will often strike a deal with the politicians to extract the natural resource, so mutual back-scratching benefits a few but not the masses. Many administrations feel they can’t lose but don’t know how to win, and this tactic provides a political solution that helps them personally. Unfortunately, the currency rises because of the resource, but the people at the bottom who don’t participate in the upside end up paying more for their food and other basic items, so their cost of living actually increases.
Geography matters, as countries in the Landlocked with Bad Neighbors Trap know. Those states without a seaport can’t easily export goods unless they travel through their neighbors’ terrain. In the bottom billion, 38 percent have uncooperative neighbors, mostly in Africa. Lacking an outlet for selling their goods at a competitive price, these countries continue to deteriorate.
In the Bad Government Trap, few opportunities exist for common people, leaving them uninformed, uneducated and therefore unable to effectively engage the marketplace. That’s what happened in China before 1978. Once China began educating her people, opportunities abounded inside the country. Without opportunity, those with education and training often leave, creating a brain drain that’s hard to overcome.
How do we overcome these traps? Collier identifies four options: financial aid, military intervention, charters and trade. This article will focus only on financial aid, which, if implemented correctly, allows states to build capacity, teach skills, and provide technical assistance. Data shows that for every $1 spent correctly, a $15 benefit results in the economy. How is financial aid best implemented?
First, financial and other forms of aid can act as reinforcement during economic reform, yet it can be a costly mistake if too much is spent too early. Financial aid becomes most useful a few years after reform has begun to take hold. Introducing consistent accountability, monitoring measurable results and focusing on the outcomes rather than the inputs typically yield better results than the traditional, top-down programs of the past that immediately poured large sums of money into reform too quickly. Prior to reform, or when it just begins, aid should be limited to funding essential needs so government benefits from the revenue and people receive basic services.
Using aid to eradicate the Conflict Trap works best when it’s limited to less than 16 percent of the gross domestic product. Data shows that in the midst of disaster or reform, with people living on less than $1 a day, spending more than that amount becomes ineffective. Being strategic by not giving too little, too much or too soon seems to be the key to long-term reform. So is being sure to avoid putting money into the wrong hands.
Aid eradicates the Natural Resource Trap only when the rich rulers truly want reform. Otherwise, they will take the money on a promise but not perform. Without a plan for true reform, any form of aid likely won’t work to eradicate a country from this trap.
Aid may be most effective against the Bad Government Trap as agencies can build in incentives and an enforcement mechanism to make sure governance changes; no change, no money. The biggest problem to overcome—and it’s a big problem—is that aid agencies (USAID, DFID, federal governments, etc.) gain political benefit by dispersing the money but not from monitoring its effectiveness. That’s why we’ve collectively spent trillions of dollars with much less success than expected. External pressure is required to ensure accountability.
If we lack the political will to change governments or hold them accountable, are there alternatives to helping the poorest of the poor? Perhaps. Microfinance is a different type of banking service that provides microcredit to those unable to borrow money the traditional way because they’re either unemployed or low-income people without collateral. Usually microfinance programs teach these new borrowers to save money and provide some insurance and other safety nets to help them become self-sufficient through small loans.
It’s not a new concept—it dates to the mid-1750s. Over the past few decades, organizations like Opportunity International and people like Muhammad Yunus, the founder of Grameen Bank in Bangladesh, have led a modern renaissance of this idea. The World Bank estimates that more than 500 million people have participated in some form of microcredit or microfinance around the world. That’s a positive outcome, but is microfinance achieving the extravagant results some claim?
Microfinance helps, but it can also hurt. Microfinance Banana Skins 2011 reported on a survey of more than 500 microfinance institutions in 86 countries that cited growing concerns about credit risk, noting, “Poor people have accumulated large debts, more debt than they’ll ever be able to repay.” Arguing that over-indebtedness could potentially lead to heavy losses among microfinance institutions, the report stated, “The problem is now so broad that it has the makings of a worldwide social and economic phenomenon.” The prime minister of Bangladesh, Sheikh Hasina, said microfinance was “sucking blood from the poor, in the name of poverty alleviation.”
The paradox of 500 million of the poorest people on Earth finally participating in society versus the high default rate and high debt load may simply be statistical semantics. Microfinance works best when there are checks and balances. The key is knowing the local situation. A personal example might help to highlight the complexity of micro-finance. My wife and I took 14 Westmont students to Port de Paix, Haiti, during spring break this year to start seven small businesses using microfinance. Before we left, we studied the issues in my class, “Business at the Bottom of the Pyramid,” and used FaceTime to talk to our partners in northwestern Haiti. Among other things, we learned it’s culturally unacceptable to have a dollar in your pocket and not offer it to others in need if asked since most Haitians live day-by-day in constant need. That’s just one reason they never end up with savings accounts.
We’ve attempted to be strategic by hiring and training three people to work year-round to manage our microfinance projects. They chose seven prospective small business owners on recommendations from the chief justice of the area, the mayor of their city and a local missions organization. The selection process alone increases accountability from the beginning since local leaders have a vested interest in the outcome. Our students trained the seven people, helped them write acceptable business plans to provide guidance, and introduced checks and balances —most of which were foreign to the small business owners—for their daily operations. Three of the businesses are moped taxis, two are used clothing stands, one is a food stand and one is a bridal boutique.
In each business, we daily monitor progress and embed accountability. Our partners on the ground collect the money, which goes into three buckets: first to the small business owner, second to paying back the loan at a modest rate, and third into a savings account located somewhere other than their pocket. It seems a rather simple process—sadly it’s seldom initiated or monitored. It’s just a matter of being smart about where you are and what you’re attempting to accomplish. The $2.3 trillion spent over the past 50 years almost never gets to this granular level. So perhaps the right solution might be to go into the village, understand the traps they face, and engage the issues directly, without a website and without fanfare.
This spring, 14 19- to 21-year-old Westmont students hopped on a plane and changed the lives of seven families. Arguably, this one class may be more effective for the Haitian people at the bottom than the various strategies employed by the World Bank, International Monetary Fund, USAID and other aid agencies with bloated, uncoordinated overhead and nine layers of mushrooming bureaucracy. We plan to do it again next year and the next, and by that time, the first year’s loans should be paid back. Over a seven-year period, as many as 100 new companies could be operating in Port de Paix with Haitians running the program. At that point, we could extract ourselves because it would be a sustainable revenue model that allows for savings, capital expenditure, disaster relief, education for their children, and better nutrition for their families—and the expertise of running a small business.
If there’s a flaw in this tale, it lies in our failure to look inward. Christians make up the largest distribution channel on the planet. If the body of Christ functions as well as it could, we could solve many of these issues without the need for all the bloated governmental programs. Candidly, in many ways the government is stepping into a role the church has abdicated. So perhaps we need to take back that responsibility and be smart, strategic and more engaged in the lives of those in deepest need of our efforts and resources. The church already spends a lot of money sending people on missions in an event-driven way. Conceivably, we could make a commitment to programs that include sustainable revenue models that require more than a one-week missions trip and pursue ones that actually permeate our lifestyle beyond the event. We may simply need to care enough to help people strategically. Perhaps studying one little community is the most effective model—one that may work better than a top-down approach. These issues are complex, and the needs are real. There’s neither a terribly precise prescription nor a route to a quick cure, yet the tent is large enough for all of us to engage at every level, and we should be doing so.
On a personal note, I’m proud of our students and their deep shift in thinking when they say, “We’ll give up our spring break, and we’ll change the lives of seven people. And then we’ll go back and do it again, and go back and do it again.” Perhaps we can turn our efforts toward dismantling injustice and alleviating poverty by simply showing up and being Jesus to the poorest of the poor. If this system works—and there will be some problems—we can change an entire community. After all, there are millions of poor people at the bottom whom globalism has left behind—a ready constituency. Absent a unifying theory of poverty alleviation, I think that’s the right way to handle a highly complex issue and start making life better for the bottom billion, even if it’s only seven people at a time.