Can Microfinance End Extreme Poverty?

A recent news article in the Guardian newspaper talked about the "microfinance delusion." In that article, Jason Hickel, an anthropologist of the London School of Economics, argues that microfinance is not as effective as believed by many in reducing the incidence of extreme poverty across the world. In fact, according to him, it can even exacerbate poverty - mainly because (i) those loans are used for consumption, (ii) the businesses opened using the funds may not have sufficient demand, and (iii) the only winners are the lenders.

There are some issues with his arguments. The poor, just like the wealthy, also need access to finance to buy consumer goods, open new business, or protect themselves from negative shocks (like hospital fees, recovery from natural disasters, etc.). Besides providing access to finance to the poor, many microfinance organizations also educate the poor about the laws of the land, their rights, and what services they can access from the government (for example, BRAC). Besides providing microcredit, many microfinance firms also provide services such as savings scheme, insurance, and assistance with asset building. Not all businesses succeed, and so it can be expected that not all businesses opened using microcredit funds will succeed. But the more important thing here is that the poor have an access to finance; they have the ability to get a loan from an organization, instead of depending upon loan sharks.

That leads to the subject of interest rates charged by the microfinance institutions. The rate is much higher than that charged by traditional banks. Advocates of microfinance say that this high rate is justified because the institutions are very labor-intensive, as the businesses opened by the borrowers may require more oversight than normal. This problem can be solved by creating guidelines by national government on how much interest can be charged by these institutions.

However, one  thing Dr. Hickel does mention in that article is that "microfinance will never work until we address the background conditions that produce poverty in the first place." This is the only plausible argument that I find in his argument against microfinance. Without proper institutions and knowledge about rights and responsibilities, microfinance, or any other poverty-alleviation interventions, will fail. For example, providing funds to women to open businesses will have little impact if women have societal barriers in conducting business. In that case, is microfinance really at fault? I don't think so. Other social and cultural norms need to change in order to make it effective. Alongside providing microcredit to borrowers, many microfinance institutions also provide education about rights and responsibilities to their borrowers, which can help them conduct their businesses.

There is no one single intervention that can eradicate poverty. Poverty is multidimensional in nature, and there are many factors - monetary, non-monetary, social and cultural norms - that can put a person in a poverty trap. Microfinance is one of the many ways that try to bring people out of extreme poverty, but it cannot solve the problem of extreme poverty just by itself. It provides a much needed access to finance by the poor. Governments should not rely solely on microfinance to eradicate poverty. Health, institutions, education and infrastructure needs to be improved in tandem with providing access to finance to the poor.

I would also like to add that microfinance facilities do help to improve certain intangibles in a person's life. For example, access to finance can allow a person to enhance their self-respect. It can increase the empowerment of those marginalized in society. It can allow people to consume products that they may not be able to under normal circumstances. Microfinance can make the marginalized feel that they are members of the broader community. In these respects, microfinance can help to enhance the quality of life to a certain extent.

Air Pollution in Dhaka, Bangladesh

It is heartening to see that the economy of Bangladesh is growing at around 6 percent annually, buoyed by a healthy garments sector and strong remittance inflows from the Bangladeshi diaspora. The rising incomes of Bangladeshis is also fueling a construction boom not only in the major cities, but in many for the smaller towns and villages dotted across the country. The population is also demanding more private transportation in the form of motor-cycles and cars. All this is undoubtedly also creating a lot of air and water pollution in the country, the negative externalities that reduce the quality of life in Bangladesh. Already, the World Health Organization has ranked Bangladesh as one of the worst countries in theworld in terms of urban air quality.  The government needs to ensure that growth can continue, while keeping such negative externalities at a minimum.

What are negative externalities? According to the textbook definition, they are the by-product of an activity that negatively affects the people not directly involved in that activity. For example, the factory spewing out pollutants in the air can cause respiratory ailments to the people who live around that factory. If growth continues without accounting for the sustainability of the environment, then these negative externalities can disrupt the normal functioning of life, put additional medical cost on families, and lower the quality of life. For example, a New York Times articlein July 14, 2013 highlighted the plight of school children at Genda Government Primary School in Savar, where the stench of the effluents from the surrounding factories severely affects the ability of students to concentrate in their studies. This may be a comical concept for a Bengali drama, but for the residents of those areas, the constant stench can severely disrupt their quality of life.

And it is just not the stench in Savar or Hazaribagh that are considered negative externalities in Bangladesh. The Air Quality Management Project (AQMP) funded by the government of Bangladesh and the World Bank estimated at 15,000 premature deaths, along with millions of cases of pulmonary, neurology and respiratory illnesses occurs just in Dhaka due to the poor air quality in the city. According to the World Health Organization, if particulate matter in the air rises above 20 micrograms per cubic meter (mcm), then it is considered hazardous. However, in Dhaka, the particulate matter can be as high as 463 mcm during the dry winter months. Another World Bank study found that almost 40 percent of the air particles in Dhaka’s air are coming from the brick kilns that surround the city, while another 20 percent comes from the road dust in Dhaka’s street.

In my economics class, I ask my students whether they want to be rich but live in a city with high levels of pollution, or sacrifice a part of their income and live in a city with cleaner air and water. Bangladesh also needs to ask this question. Economic growth can increase the money income of Bangladeshis, but if they have to spend a large portion of their income on treating their respiratory illnesses rather than enjoy consumer products, or have to live a shorter lifespan, then what good is that life? If the rivers become too toxic for the fish to survive, then what will happened to the thousands of fishermen whose lives depend upon this sector? Thus, the government must ensure that the air and water quality are improved. As most of the air pollutants in Dhaka come from brick kilns and road dusts, steps can be taken to encourage brick kiln owners to adopt cleaner technologies. Banning brick kilns will not help as the government has already faced opposition, but subsidizing the use of cleaner technology and encouraging brick kiln owners to adopt them can help clean up the air in Bangladesh by a large extent. Also, watering the major roads during the dry season can help to prevent road dust from floating in the air.  Similarly, the rivers and canals of Bangladesh needs to be cleaned so that the water is potable and fish can survive in them. Effluents need to be piped to a cleaning facility so that they do not pollute the waterways.

The costs of implementing such projects, but the benefit can be very high. It can reduce thousands of deaths, reduce different types of respiratory illnesses, and improve the general quality of life. The money can be easily raised by imposing a small tax on the products that contribute more to pollution (also called Pigouvian tax). For example, a 50 paisa tax on each brick can help to fund the air clean up operations in Bangladesh. Without steps to reduce these negative externalities, Bangladeshis will continue to suffer, which can put a huge dent in the overall development goals of Bangladesh.

What can we do to help the poor?

We normally leave it to the governments to take charge of alleviating poverty. However, our small efforts can help to promote inclusive growth and alleviate poverty, both in our neighborhood and globally. Our small efforts collectively can have a huge effect on the lives of millions.

In our neighborhoods, there are a number of charitable organizations/volunteer groups that help the poor and needy. We can volunteer at those organizations, or make monthly donations to them. A simple search on a search engine can list a number of charitable organizations in our area. Organizations like Habitat for Humanity, Kiwanis Club, and local church groups are great places to volunteer to help those in the local community.

Internationally, there are a large number of organizations doing commendable work to help the poor. Some of those organizations (the list is by no means exhaustive) are:
1. World Health Organization
2. UNICEF
3. Save the Children
4. Care
5. BRAC
6. Grameen Bank
7. Kiva
8. Red Cross
9. The Malala Fund
10.  ...... and many more

The advantage of giving money to our local or foreign charities is that most of the money goes directly to the benefit of those in need. Less money is lost in the way as it moves from our pockets to those who are in need.

The donations need not be large, one time amounts. If we all donate $5 or $10 per month to these organizations, we can create a world of difference.

Instead of waiting for world leaders to take actions to reduce poverty, we all can do our small part to make extreme poverty history in this world.

South Asia Regional Integration

South Asia is a region encompassing the countries of Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The region is economically, culturally, linguistically and geographically diverse, which is why the region has been aptly called a sub-continent. Very little binds the region together, except probably a common history of colonization by the British. The region has been the fastest growing region in the world in 2016; yet it also houses the largest number of poor in the world. However, much of the growth is because of the high growth rate that India will experience in the next couple of years. 

Although South Asia is home to 1.6 billion people and has a combined GDP of about $2.4 trillion, most of it is concentrated in India (population of 1.2 billion and GDP of $1.8 trillion). Compared to India, the other South Asian countries are relatively small in population and GDP size. The region is also one of the least integrated in the world - intra-regional trade accounts for only about 4 percent of the total trade of South Asia in 2011. The South Asian countries are more inclined to trade with non-South Asian countries than with their neighbors. 

Development partners have recognized the importance of regional integration in South Asia, and so, there is a push for greater regional integration among South Asian countries. Since India is the largest country in the region, it is expected that most of the intra-South Asia trade will happen between India and the rest of the South Asian nations. Also, India is by far, the largest country by GDP in the region, so other countries may be wary of opening up too much, fearing that their local industries might be overwhelmed by Indian products. Thus, it would be a better for these nations to cooperate and produce goods together and then export them to the rest of the world. For example, Bangladesh is the second largest garments exporter in the world, and India and Pakistan are large cotton producers. If the region were integrated, cotton could be transported by ship/train from Pakistan/India directly to Bangladesh. Hydro-power can be produced in northern Pakistan, Nepal or Bhutan and then transmitted across the region. Colombo port could be a transportation hub for all of South Asia shipping goods from the region to the rest of the world. The possibilities are endless. The region can grow rich together and concerted efforts can lift millions of South Asians out of poverty.

There are some steps that are being taken to increase connectivity among some of the South Asian nations. Nepal, Bhutan, Bangladesh and India are agreeing on a transportation deal that will facilitate the movement of vehicles between these four countries. This can help Nepal and Bhutan to use Bangladeshi seaports to export their goods abroad. However, the progress is slow. The region should encourage more tourism among these nations, and remove different barriers to trade. It should be more open to freer flow of goods and services, and this will help the region to grow even faster and ensure a more pro-poor growth. 

GDP in US Cities

A recent article on MarketWatch showed a map which pointed out that half the GDP of USA is concentrated in a few cities only. On first thought, it seems about right because most of the US is sparsely populated (think about the western states). I thought I should do a little more analysis to see how much this holds. I collected real GDP (chained 2009 dollars) of some of the largest metropolitan statistical areas (MSAs) of the US from the website of the Bureau of Economic Analysis (www.bea.gov). I also collected the population data of those MSAs from the Census Bureau. The data is tabulated below:

These 24 MSAs do indeed produce half the GDP of the US. If you look the population, these 24 MSAs together house about 123.5 million individuals in 2010. Thus about 40 percent of the population of the US do live in these 24 MSAs. Another way of looking is that 50 percent of the GDP of US is produced in these 24 MSAs, where 40 percent of the US population resides.

If we look at per capita GDP of these 24 MSAs, we can find that each inhabitant of these MSAs have a GDP per capita of about $66,000. The rest of the US has a GDP per capita of around $40,000 (the US average is around $50,000 in chained 2009 dollars). Thus, these 24 MSAs have a GDP per capita that's about $24,000 more than the GDP per capita of the rest of the country. This shows that the largest MSAs in the US are considerably richer in GDP per capita terms than the rest of the country. There can be a lot of reasons why this is so. There is considerable positive spillovers (more businesses opening, people learning skills from each other) that can accumulate in an area that has high population density. So, that can explain why the largest cities also have high GDP per capita.

However, this does not imply that the status quo should be maintained. To promote a more equitable growth, the governments, both federal and state, should promote growth in the smaller MSAs. Increasing business activities in the smaller MSAs could help to bridge the the income gap we see from this table. It can also promote a more balanced growth across the country, and make the county considerably richer.

Addendum: Helping First Generation University Students

I wrote a blog about helping first generation university students succeed in their university life. A few days later, a New York Times news article  was published that pointed out the large difference in graduation rates between the rich and the poor. Only 14 percent of individuals who grew up in the most disadvantaged families ended up getting a bachelor's degree, while 60 percent of individuals from wealthy families earned a bachelor's degree.

This can have a big impact on the earnings potential of children who grew up in rich and poor households respectively. A high school graduate earns 62 percent of what their peers with a college degree earns. To make things worse, the unemployment rate among college graduates is much lower than that among high school graduates.

This shows that we need to support first-generation and poor individuals once they enter college. They need a lot of support to finish their undergraduate education. An undergraduate degree can have a huge effect on their earning capabilities, and can increase their upward mobility.

Food Deserts in the US

Food deserts are said to be regions that do not have easy access to fresh, healthy and inexpensive food. This interactive map of the US Department of Agriculture shows the regions in the US where food deserts exist. The following method is used to determine whether a census tract, whether urban or rural, is a food desert. A census tract is considered to be a food desert if it satisfies the following criteria:

1. the tract is a low-income community, where the poverty rate is at least 20 percent OR the median income of the family is less than 80 percent of the median income of the area.

2. at least 33 percent of the population or 500 individuals live more than a mile away from a grocery store or a supermarket (for urban census tracks) or more than 10 miles away (for rural census tracts).

According to the USDA, about 23 million live in food deserts, and about half of them are low-income. However, some places have more people living in food deserts; as seen in Baltimore, around 20 percent of the population live in regions that are termed as food deserts. Although distance may not be much, it might be very cumbersome to walk or get on the bus to get grocery that is a few miles away.

Could the emergence of food deserts be a problem? In rural areas, the emergence of food deserts can worsen health outcomes. The poorer and older members of the community may not get healthy nutrition.  This report also says that counties that have characteristics of a food desert tend to have:

1. large percentage of adults with less than high school or GED degree
2. higher number of convenience stores or small grocery stores per capita

Without access to healthy food that is inexpensive, people have to rely on fast food or packaged to meet their nutritional needs, food that may not be healthy or nutritious.

However, its not about the distance that important. Price of healthy food needs to be low enough so that people living in food deserts can afford them, along with proper marketing of healthy foods. A lack of grocery stores that sell nutritious foods can have a adverse effect on the health of young consumers who live in low-income families. A study finds that if a region has more convenience stores, then obesity rates among young consumers are higher when compared to regions with less convenient stores. The same study finds that the more grocery stores an area has, the lower is the obesity rates among low-income pre-school children.

According to American Heart Association, obesity among children has been rising over the years, and the rate is higher among children living in low-income households, and the cost of obesity among adolescents in the US is said to be around $250 billion. This is a huge drain to society, and it can only increase if the prevalence of obesity keeps on increasing.

Thus to reduce obesity among children, policymakers need to focus on educating children about the benefits of nutritious food. Efforts also need to be put to increase the number of grocery stores in food deserts. Communities can be encouraged to grow vegetable gardens in empty plots; and non-profits can be asked to help bring nutritious foods to food deserts. These can help to increase availability of nutritious foods and reduce the cost to the economy.