Photo by Elmira Bayrasli
Is it okay to profit off the poor? I, along with a number of other development junkies, debated this point over Twitter on Friday. It came at the behest of the inimitable Matthew Bishop, co-author of Philanthrocapitalism.
He did so following a blog post he and co-author Michael Green wrote following Muhammad Yunus’s reaction over the news that Indian micro-lending outfit SKS raised close to $350 million in an initial public offering. Yunus, the godfather of microcredit, alarmingly quipped that the IPO, “is pushing microfinance in the loan sharking direction,” and “endangering the whole mission.”
When Yunus, following the example of Opportunity International, initiated micro-lending in his native Bangladesh in 1974 he meant it to be a resource where the poor, despite lacking the collateral, could borrow small amounts to start activities and not be subject to for-profit terms. “Microcredit was created to fight the money lender, not to become the money lender,” Yunus said.
To be fair, the Nobel Laureate isn’t against the private sector. Yunus engages with corporations such as Danone on various poverty alleviation efforts. He just doesn’t think it belongs in the micro-lending business. He doesn’t believe it’s okay to “profit off the poor.” Certainly when posed in that way, it’s hard to disagree. Yet I daringly and respectfully do. Like Matthew and Michael, I see the SKS IPO as an “important step toward fully engaging the mainstream capital markets in the fight against poverty.” Here’s why:
Without question micro-lending has succeeded in improving the lives of the poor. It has not, however, succeeded in pulling poor countries out of poverty. Yunus’s own Bangladesh, as World Bank stats show, is evidence. That’s because entrepreneurship – and particularly micro-entrepreneurship – itself isn’t enough to end poverty. A micro-enterprise yields one, two or, at the most, three jobs, allowing a single family to gain control over its own income. It does not, however, allow money to circulate through a community. The difference between developed and developing countries isn’t the capacity for its citizens to innovate. It’s in the ability for money to flow through the system, through taxes and disposable income.
That is significant. Without the circulation of money, governments can’t pay teachers, provide clean drinking water or repair roads. Communities don’t have access to innovations such as medicines. Yes aid and charity provide necessary palliatives, but they’re not high-quality nor sustainable. And sustainability is key.
“Sustained economic growth requires companies, writes The New Yorker’s James Surowiecki, “that can make big investments – building a factory say – and that can exploit the economies of scale that make workers more productive and, ultimately, richer.”
Secondly, if the goal is to eradicate poverty and turn the third world, as Yunus says, “into a poverty museum,” then it is impossible to avoid capital markets. The private sector is an integral part of the developed world. To imagine that one can take a country from rags to riches without incorporating the for-profit sector is naïve – at best. Despite its faults, (and it has many) and (negative) history in the developing world, the private sector must play a role in development. And that means the poor must play a role in the private sector. Protecting them through aid and philanthropy is misleading. For one, aid floods the markets, making them impossible to develop. More importantly, both sustain the hierarchy between the “haves” and the “have nots.” Handouts prolong dependency and create no incentives for entrepreneurial innovation. Finance, on the other hand, as we have witnessed in Silicon Valley, stimulates innovation and growth. THAT is what the poor need more than anything else.
And that makes me wonder if the question of Friday’s debate should have been “is it okay for the poor to profit?” Certainly when you pose it like that, it’s hard to disagree.
3 Comments
Agree entirely that poor people should profit by stimulating innovation and growth. Elmira.
In our founding paper part of the argument was that whereas handouts were donated and gone, stimulating innovation in disenfranchised communities would create new wealth flows.
So that’s why my [now] colleague set about doing in 1999 when Russia’s economy collapsed and what we’ve continued to do since I joined him in a profit-for-poverty approach 6 years ago where “profit is redefined in human terms rather than pure quantitative analyses that remove human and social concerns in the name of profit.”
.
In 2000 Bill Gates had declared that ‘poor people don’t need computers’ but he was to change his views, now hear him.
http://people-centered.net/Capitalism.aspx
It was a pretty simple idea, that capitalism in spite of being a very effective engine for economic growth. failed to benefit all. That there was nothing wrong in doing business for profit, but if some companies would determine that the entire point of that profit was to stimulate a local economy it could end much of the human suffering we know today.
We do it as a very small business still, yet can reasonbly claim to be punching our weigh in terms of influence.
http://people-centered.net/Services.aspx
Jeff Mowatt
Fast forward from the above 10 years and the location is Ukraine, a nation devastated by greed. Children from institutions graduate onto the streets for a career in vice, trafficking and crime help to fuel an HIV epidemic. The poorest are most definitely profited from, in that homes for the disabled are siphoned of typically 80% of all resources. How could be that be changed, such that the vicious cycle of poverty could be broken and families able to profit enough, such that children weren’t abandoned to the state in the first place and those now on the streets could be placed in a family home environment?
The suggestion was a ‘Marshall Plan’ approach against ‘hunger. poverty, desperation and chaos’ with a social enterprise innovation fumd. It called for support from US gov, weighing the cost, investment of $1.5 billion against, what was then being spent in Iraq each week.
“Enterprise is any organizational activity aimed at a specific output or outcome. Once the output or outcome – the primary objective – is clear, an organization operating to fulfill the objective is by definition an enterprise. Business is the most prominent example of enterprise. A business plan, or organizational map, provides a reference regarding how an organizational scheme will operate to produce a specific outcome: provision of products or services in a way to create profit. Profit in turn is measured numerically in terms of monetary gains, the “bottom line.”
“This is the function of classic capitalism, which has proven to be the most powerful economic engine ever devised.
“An inherent assumption about capitalism is that profit is defined only in terms of monetary gain. This assumption is virtually unquestioned in most of the world. However, it is not a valid assumption. Business enterprise, capitalism, must be measured in terms of monetary profit. That rule is not arguable. A business enterprise must make monetary profit, or it will merely cease to exist. That is an absolute requirement. But it does not follow that this must necessarily be the final bottom line and the sole aim of the enterprise. How this profit is used is another question. It is commonly assumed that profit will enrich enterprise owners and investors, which in turn gives them incentive to participate financially in the enterprise to start with.”
“That, however, is not the only possible outcome for use of profits. Profits can be directly applied to help resolve a broad range of social problems: poverty relief, improving childcare, seeding scientific research for nationwide economic advancement, improving communications infrastructure and accessibility, for examples – the target objectives of this particular project plan. The same financial discipline required of any conventional for-profit business can be applied to projects with the primary aim of improving socioeconomic conditions. Profitability provides money needed to be self-sustaining for the purpose of achieving social and economic objectives such as benefit of a nation’s poorest, neediest people. In which case, the enterprise is a social enterprise. ”
http://en.for-ua.com/analytics/2007/08/09/110003.html
Now returning to Yunus, I was rather interested when listening to his recent interview with matthew Taylor of the RSA, to hear one of the audience refer to her problems in trying to introduce microfinance to Ukraine. She told Yunus that loans to help women into business went largely to feed mafia. He doesn’t seem to have much of an answer for her.
http://www.thersa.org/events/audio-and-past-events/2010/building-social-business-the-kind-of-capitalism-that-serves-humanitys-most-pressing-needs
Following this up I was to learn that the project referred to had been conducted in mafia heartland.
The Grameen loan circle approach is one of moral collateral, designed such that poor people have access to finance for starting business rather than the type of microfinance typical of Eastern Europe in general which is based on lending to existing business.
Our research in this country found USAID sponsored schemes where numbers just didn’t add up, in terms of premises rental and sale price of goods in the context of local economic conditions. I was there talking to a local stall holder when uniformed police arrived to collect protection money.
In Tomsk, Russia success, reflected in a 99% first year survival rate for the thousands of businesses created, had a lot to to with the decision on a ‘moral collateral’ approach. In this interview describing Tomsk and a follow on project for Crimea’s repatriated Tatars. Until fairly recently, it had been deemed necessary to block our own project by means of copyright to prevent siphoning by local government.
http://www.iccrimea.org/scholarly/economicdev.html
It should not be this way, with organisations like ours having to take a stand, in some cases against the greater influence of development agencies which represent our own countries. In this context no true measure of effectiveness can be made without a mechanism for public accountability.
2 Trackbacks
[...] This post was mentioned on Twitter by matthew bishop, Elmira Bayrasli and Elmira Bayrasli, Firdaus Hashim. Firdaus Hashim said: RT @mattbish: RT @endeavoringE: Prompted by the #propoor debate RT @endeavoringE: Profit: A dirty word? http://is.gd/dYJTH [...]
[...] Elmira Bayrasil on why ‘profit’ is not a dirty word (or at least shouldn’t be) in the world of development and why capitalism is necessary… [...]