A Pit of Rational Absurdity

NOTE: This is a student work and should not be referenced for any formal academic purpose.

Introduction

While macroeconomic development policy fails the world’s poorest citizens, investment in Micro-finance Institutions can provide disadvantaged individuals in developing countries with the opportunity to escape poverty.

International financial organizations often emphasize the use of macroeconomic reform to help developing countries overcome economic hardship and reduce poverty. While macroeconomic policies promoting foreign direct investment, deregulated capital flow and trade liberalization have the potential to produce rapid economic growth within a developing country, these policies often prove detrimental to the poor. While short-term investment and liberalization of trade may stimulate rapid economic growth, many historical examples expose the temperamental nature of these macroeconomic policies, and clearly demonstrate how negative speculation can cause massive capital flight that detriments economic growth and poverty alleviation efforts.

Micro-finance provides the poor with financial services that allow them to avoid entrapment in working-class oppression resulting from foreign investment in a developing country. The ability to save and borrow money enables poor individuals to expand their incomes and plan for the future. Entrepreneurialism has played a great role in reducing poverty in countries such as China, Taiwan, South Korea and Brazil. Greater concentration on domestic small-business ventures that allow innovative new industries to grow, results in stable long-term growth and has a more immediate impact on the quality of life of a country’s poor.

Although Micro-finance services are limited by factors such as high-interest rates and inaccessibility to remote rural areas, the application of Information Technology solutions will greatly enhance the effectiveness of this form of development in the near future.

Therefore, I posit that a greater investment in the provision of Micro-finance services will produce a significant improvement in the quality of life of the very poor, and will, over time, contribute substantially to national economic growth.

Macroeconomic Hegemony

Organizations such as the International Monetary Fund emphasize the use of macroeconomic reform to assist countries facing economic hardship. The IMF acts as lender of last resort, providing countries with financing to resolve balance of payment deficits. The loans provided by the IMF are accompanied by structural adjustment programs intended to ensure that loaned money is spent in an effective manner that will allow the IMF to recuperate the loan. Compliance with structural adjustment programs, which include currency devaluation, export of natural resources, trade liberalization and privatization of public enterprises, are prerequisites to the receipt of relief money. The IMF often cites poverty reduction as one of its ambitions, however, the SAPs it imposes often result in worsening conditions for the poor.

Loans provided by the IMF are intended to transform a nation into a financially attractive investment to foreign business and to help ensure a country is able to eventually repay the loans the IMF has provided. When the interests of wealthy investors and the well-being of a nation’s poor clash, the IMF consistently encourages prioritization of policies that stimulate economic growth over those directly aimed at poverty reduction. This direction is further promoted by affirming that economic growth will have the side-effect of reducing poverty. However, a 2005 study conducted by the IMF on the effectiveness of its own Poverty Reduction and Growth Facility program found that,  “… while macroeconomic outcomes in low-income countries had improved markedly in recent years, per capita income remains low.”

A 2007 report by Ilan Noy of the Department of Economics at the University of Hawaii concluded that participation in IMF programs resulted in premature liberalization of capital flows in developing nations.

By removing barriers that restrict the flow of capital to and from developing nations, investors are able to easily move funds into a country during periods of growth, and quickly remove them in the presence of adverse speculation.

“In 1996, total private capital inflows to Indonesia, Malaysia, South Korea, Thailand, and the Philippines were $93 billion, up from $41 billion in 1994. In 1997, that suddenly changed to an outflow of $12 billion. Hence it has become apparent that crises attendant on capital mobility cannot be ignored.”

While this is greatly advantageous to investors, who realize massive short term economic gains in boom times, the foreclosures and bankruptcies that result during periods of economic uncertainty devastate local economies and worsen the condition of the nation’s poor. The Latin American debt crisis of the 1980s, for example, set economic growth back an entire decade, when refinancing of short-term loans was refused.

The proliferation of short term investment in developing countries introduces exorbitant risks to the general population of these countries. Allowing unregulated flow of capital endangers those living in poverty who have no savings to cushion the impact of recession. It is essential that capital enter a developing nation in a progressive manner, that this capital be used to grow industry responsibly, and that further investment take place based upon measurable growth rather than speculation.

Additionally, rapid liberalization of trade policies also undermines the efforts of local entrepreneurs who possess great capacity to raise themselves out of poverty, and by expanding their business and hiring new employees, create new opportunities for others. In fact, most successful examples of economic development and poverty reduction are characterized by this type of venture.

“Unorthodox innovations that depart from the integration rule book are typically part and parcel of such strategies. Public enterprises during the Meiji restoration in Japan; township and village enterprises in China; an export processing zone in Mauritius; generous tax incentives for priority investments in Taiwan; extensive credit subsidies in South Korea; infant-industry protection in Brazil during the 1960s and 1970s – these are some of the innovations that have been instrumental in kick-starting investment and growth in the past.”

In each of these cases, local collaboration and conservative trade policy allowed small business to grow, employing more individuals and creating successful businesses that contributed significantly to the reduction of poverty in these countries. For example, in China, employment in township village enterprise grew from 28 million in 1978 to 135 million in 1996 and contributed significantly to the economic expansion of the Chinese economy.

Solutions such as these, emerged from private business and public development ventures and each was characteristically unique to the local conditions of the particular country. These types of ventures are exactly the type of enterprises that Micro-finance loans enable. South Korea, China, Taiwan and India all clearly demonstrate the necessity of cultivation of domestic industry for economic development and poverty alleviation.

The Micro-finance Approach

Micro-finance refers to the sustainable delivery of financial services to very poor clients with little or no capital savings and few assets. Individuals who meet these conditions cannot secure loans or open savings accounts from traditional financial institutions because the small scale of these loans, coupled with the overhead involved in managing them and lack of appropriate collateral, make them undesirable to traditional banks. Institutions have emerged who specialize in providing these essential financial services to the poor. These organizations are referred to as Micro-finance Institutions or MFIs. Micro-finance provides the world’s poor with the means to lift themselves out of poverty in a gradual and sustainable fashion, allowing them to expand their enterprises and safely accumulate savings that allow them to purchase assets, make their own investments, send their children to school and prepare for unforeseen financial hardships. Micro-finance Institutions often operate by organizing prospective borrowers into solidarity groups who divide shares of a larger loan. This system reduces the overhead involved in making many smaller loans to more people. Additionally Micro-finance Institutions employ the concept of social-capital (peer pressure and mutual support) in place of traditional collateral to encourage repayment.

While increasing investment in Micro-finance does not create jobs on the same scale as Foreign Direct Investment, the long term benefits of the enterprises it cultivates are far more beneficial to the nation’s poor. While macroeconomic policies have failed to show significant increases in per-capita income, a small micro-finance loan can allow a small business to double or triple it’s output in a short period of time, resulting in a significant income improvement for the loan recipient.

Consider the story of Odette, a woman in Haiti, who sold sandals in a local market. She frequently traveled to the city to purchase small quantities of sandals and then returned to her town to sell them. She was unable to raise sufficient capital to expand her business to purchase larger quantities of shoes or diversify her inventory, however, after receiving a series of loans from a MFI, Odette was able to expand her business. She now focuses upon purchasing mattresses wholesale and transporting them from the city for sale in rural markets.

Odette’s story is not extraordinary; After approximately 8 years of borrowing, 57.5% of clients of the MFI, Grameen Bank, are no longer in poverty. The average income of borrowers of Bank Rakyat, an MFI in Indonesia, increased by 112%. BRAC, an MFI operating in Bangladesh, reports that their clients have increased household expenditures by 28% and increased assets by 112%.

Odette now has sufficient capital to accumulate assets. In fact, she was able to purchase land and build her own home. She now has the financial stability required to ensure that her children do not have to leave school to help her provide for the family. This greatly increases the likelihood that her children will become educated and find meaningful work.

“In Bangladesh, almost all girls in Grameen client households had some schooling, compared to 60% of girls in non-client households. The schooling rate for boys was significantly higher - 81% of boys in client households received some schooling, compared to 54% in non-client households. Basic competency in reading, writing, and arithmetic among children 11 to 14 years old in BRAC member households increased  from 12% in 1992 to 24% in 1995, compared to only 14% for children in non-member households.”

Micro-finance has clearly demonstrated the potential to greatly enhance the education of children born into poverty. This is a powerful example of how Micro-finance can produce massive change in socioeconomic status within a relatively short period of time.

Limitations of Micro-Finance and Practical Application of Information Technology

A major concern in the Micro-finance industry is the necessity to charge interest rates that are considerably higher than those charged by traditional banks. This necessity stems from the larger overheads associated with managing many small loans. While this is an important concern, high-interest rates allow MFIs to continue operations sustainably, without reliance on subsidies or donations. Rates charged by MFIs are still very competitive compared to those charged by informal money lenders. Additionally, by cutting transaction costs, MFIs were able to reduce average interest rates by 2.3 percent from 2003 to 2006.

Application of Information Technology can further reduce an MFIs operating costs, allowing them to provide lower interest rates to their clients. By digitizing loan management and making these details available over the internet, fewer personnel are needed in branch offices to process loan requests. Instead, these jobs can be concentrated in a central location that can process loans more efficiently.

MFIs also encounter difficulty providing micro-loans to individuals in very remote and sparsely populated areas. However, as infrastructure improves, video conferencing and online banking solutions may enable MFI staff to collect and distribute funds remotely which would allow loans to be made regardless of distance.

Open-source software ( software made available to the public and to private companies free of charge ) plays a great role in the future of Micro-finance. The Grameen Bank has invested in the development of a free Micro-finance web-solution called Mifos. This software allows any MFI to download and use this software to manage their loans. Providing this software free of charge removes a significant barrier to the creation of new Micro-finance Institutions. The aggregation of data managed using Mifos will also provide more reliable statistical data that will help evaluate the effect of Micro-finance and improve the efficiency of loaning practices.

While Micro-finance represents an innovative path for many of the world’s poor to exit poverty, it is not a comprehensive solution. Micro-loans only benefit those who are able to use their loans to generate higher income, that allows them to repay the loan plus interest. This prevents Micro-finance from directly benefiting those exposed to unstable political environments, malnourishment, disease and natural disasters.

Micro-finance is also limited by its, almost exclusive, focus on women. Statistical reports quantitatively conclude that when loans are given to women, a larger percentage of funds are used to improve household conditions relating to education, health and nutrition. While some argue that this empowers females, increasing the importance of their role in the community and providing them with greater influence on decisions impacting households, others argue that this may lead to increased marital friction and also unduly forces additional responsibility upon women.

Additional research is required to determine appropriate methods for extending Micro-credit to men in a manner that promotes responsible spending and encourages higher rates of repayment.

Conclusion

Macroeconomic policies encouraged by organizations such as the IMF attempt to provide relief to disadvantaged countries while simultaneously facilitating the interests of industry in developed nations. In many cases these two activities fundamentally oppose one another. Increased participation in the global economy must occur while respecting the importance of growth in domestic industry. Cultivating an entrepreneurial culture within developing nations is essential to promoting both poverty alleviation and economic growth. The most successful nations in the world today developed, in large part, as a result of entrepreneurial ingenuity and innovation. Micro-finance provides the poor with the assistance they require to develop these entrepreneurial skills. While Micro-finance does not provide a comprehensive solution to poverty, it does play an important role. Further investment in Information Technology will expand the reach of Micro-finance Institutions to a greater percentage of the world’s poor. It is therefore important to recognize the significance of Micro-finance in the development of the global political economy.

Works Cited

Armendariz, Beatriz. Gender Empowerment in Microfinance. Harvard University, June 2008.

CGAP. When is Microcredit Not the Answer. http://www.cgap.org/p/site/c/template.rc/1.11.947/1.26.1306/ (accessed March 16 2009).

CGAP. What Do We Know about the Impact of Microfinance? http://www.cgap.org/p/site/c/template.rc/1.11.947/1.26.1306/ (accessed March 16 2009).

Grameen Bank. Odette’s Story. http://www.grameenfoundation.org/where_we_work/latin_america_caribbean/haiti/odette_s_story/ (accessed March 16 2009).

IMF. The Poverty Reduction and Growth Facility (PRGF). http://www.imf.org/external/np/exr/facts/prgf.htm (accessed March 16 2009).

Naughton, Barry. The Chinese Economy: Transitions and Growth. Cambridge: MIT Press, 2007.

Noy, Ilan. The IMF and the Liberalization of Capital Flows. University of Hawaii at Manoa, 2007.

Oatley, Thomas. The Global Economy : Contemporary Debates. New York: Pearson, 2005.

The tradition of marriage is something I’ve been discussing with a lot of people lately. As a result of these conversations I’ve kind of reached some conclusions about it, that I wanted to write down.

• It seems like marriage is first and foremost a religious tradition. If you are not religious, then getting married is simply a celebration of mutual commitment.
• In general, humans are not good at monogamy. In Canada about 50% of marriages end in divorce. It’s also becoming less popular; From 2002 to 2003, most provinces had fewer marriages. The only provinces who experienced growth were Ontario and British Columbia, the provinces which allowed gay marriage.
• Monogamy is not popular amongst mammals. Only 3-5% of mammals form lifelong partnerships. Even within these relationships, occasional flings are not uncommon.
• Marriage is a patriarchal institution, that historically represents the transfer of responsibility for a woman from her father, to another man (This is most clearly seen when the father literally, “gives his daughter away”, during a wedding ceremony). In this sense it is very oppressive towards females.

So what purpose does marriage have?

It seems that marriage provides people with contractual reassurance that their partner will fulfill their end of shared responsibilities, such as a mortgage, or the raising of children. However, these responsibilities are not lifelong commitments, so why do we require a lifelong commitment from our partners? If after raising children and paying off your mortgage, you seek a drastic change in your life, one that your partner is incompatible with, you are only sacrificing mutual happiness by staying in the relationship.

Why should we surrender our independence?

Independence is a very valuable possession. I believe we are happiest when we are allowed to play by our own rules; however, it is also clear that compromises are necessary in order to get the things we want in life, while maintaining the relationships we enjoy. Although this is true, we should avoid giving up our dreams and ambitions for fear of betraying an ancient tradition; life is too short not to pursue our independent interests.

What happens when we become dependent?

The problem with everything I have just said is that it assumes lifelong independence. Clearly we are not independent creatures our entire lives. We are reliant on our mothers while nursing, our families for helping us to develop into self-sufficient adults, friends and loved ones for emotional support during periods of misfortune and care from our partners and children as we age.

So maybe this is the true purpose of marriage. The sacrifices we make are paltry in comparison to the value we place on having someone we can always rely on. Marriage is a celebration of mutual trust. Maybe the only way to establish mutual trust is through a lifelong commitment. Maybe this is reason enough to move to another country, or become less ambitious in your career in order to start a family, or clean up dishes for the hundredth time in a row, or argue over the purchase of a new TV.

It’s important to understand that people have unique criteria for establishing trust. While for some, adulterous behavior may completely and instantly negate all accumulated trust, for others, allowing exploration outside of a partnership may strengthen trust within it.

While the traditional definition of marriage may be inhibited by strict definitions encouraged by irrational religious institutions, it is still beneficial to have a trustworthy partner who can provide stability in an otherwise chaotic and unpredictable life. Further, it is valuable whether it takes the form of a lifelong friendship, civil union or marriage, between any number of individuals of any combination of gender.

I have a new habit of taking my iPhone to sleep with me. To fall asleep I usually play a game of sudoku, risk, or touchgrind. When I wake up I reach for my phone and catch up on email while I’m waking up. Now even when I finally close my computer for the day, I take a few steps, get in bed and plug back in. I think I have an addiction!

By the way, this post, also written from bed.

It has been an extremely productive year; I am very proud of the projects I have undertaken and completed within these final two semesters, but I certainly feel the experience was very repressive.

I worked very long hours. In the past 8 months I’ve helped build a console game for the Xbox 360, composed a 3D animated short, completely redesigned my parent’s business website, took a very challenging second year political science elective, and constructed and developed a business application for Facebook. This is aside from other smaller projects I’ve undertaken such as building a twitter notifier for brush-fires in Australia, building a comprehensive set of plugins for Wordpress for a local independent movie theatre, and other small projects I’ve helped my friend John with. All of these experiences were immensely valuable, but at the same time, this year did some damage. In fact, I think this period of time for me, will always be embodied by the very painful cyst I developed on my ass that kept me in bed for three days.

The past eight months I’ve felt very overwhelmed. I found myself really searching for greater meanings, as a way of relieving myself of some stress. I came to really appreciate meditation, since it seemed like an easy, albeit, temporary escape from the stress induced by my responsibilities. I found it helped when I remembered to do it, but I always de-prioritized this when deadlines were emerging, the times when I think it could have relaxed me the most.

I felt very socially detached. I think Calina moving to DC had a great deal to do with this, but I also think a very long and cold winter exasperated by a lack of public transit, compounded the issue. I had a very hard time feeling comfortable with people, and felt like my mind was usually somewhere else. I’ve gotten worse at remembering dates and times. There have been many instances where I have forgot important things, cancelled plans or made unwise decisions.

I stopped exercising and my diet went to hell. I could never find time to cook for myself, clean the house, or exercise. Whenever I spent time doing one of these things, I felt like I was being irresponsible with my time, that I should have been working on a school project instead of relaxing by cooking for myself or going for a run. I am only recovering from this now; the onset of spring has made going outside irresistible.

Yesterday, as I was sweeping massive accumulations of dust from the corners of my room, I kept repeating the words “harmony” and “resistance” in my head, over and over. I feel like this year has been consumed by man-made obstacles that induced a great deal of stress and prevented me from doing the things I wanted to do.

I think this year will be more harmonious. I think I can reinstate a sense of balance in my life between the projects I want to work on, the relationships I want to nurture, and my own health. This weekend has been particularly refreshing and I’m excited to see what the coming months will bring.

Here is a small video I made of Calina and my trip to Costa Rica and Panama in December of ‘08. All the video was taken using cycorder for the iPhone. It’s a pretty wicked little application. I love having the ability to take these tiny impromptu videos. I think it’s a great way of capturing some of the unexpectedly interesting events in life. I have more video from my trip to Washington DC, and New York that I’ll try and assemble shortly. Enjoy!

Calina and I in Costa Rica and Panama from Dan Imbrogno on Vimeo.