Living proof of the power of capital?

This post comes from one of our occasional guest bloggers, Dr Laura Spence,from Royal Holloway, University of London. She's also the unofficial Crane and Matten photographer having been responsible for our latest profile pic to the right, (as well the one it replaced). Thanks Laura!

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While Crane & Matten have been enjoying a well earned break, I had an intriguing and thought-provoking week here in the UK. On Monday I was invited to a talk by Bill and Melinda Gates, the entrepreneur behind Microsoft and his wife. The purpose of their talk was to spread the word on an initiative called the ‘Living Proof project’. They asked the audience to tell the story further, which I am happy to do here.

Akthough focusing only on US investments, Living Proof reminds us of the progress that investment in sustainable development has resulted in over recent decades. The Bill and Melinda Gates Foundation have played a substantial role in these improvements alongside government aid and the work of charities and other institutions globally (though interestingly not much mention was made of the contribution, such as it might be, of business).

Some of the incredibly encouraging facts that Bill and Melinda presented are worth registering: 5.4 million child deaths were averted through immunisation between 2000 and 2009; we are nearing the eradication of polio; 98 million fewer people are going hungry in 2010compared to 2009; in Africa measles deaths dropped by 92% between 2000 and 2008.

No-one is suggesting that poverty and public health are not still critical problems globally, but progress has been made. Aid is a large part of the reason for these wonderful improvements in the lives of the poorest. Highlights of their talk can be seen at: http://www.one.org/international/livingproof/share/?rc=email , or for the full blown version, go to http://www.one.org/international/blog/?p=3988 .

Meantime, I have been pondering what it is that makes people like Bill and Melinda Gates, who have dedicated a large part of their lives to generating vast wealth, switch focus and seek to give it all (indeed, 95% in their case) away. They are not the only ones to take this route (think of James Carnegie, William Hesketh Lever, George Cadbury, Thomas Holloway). And I should say I don’t mean to have a dig at Bill and Melinda. I wish others would take a leaf out of their book. But what is it that motivates such a shift?

It would be easy to assume that in some cases it is to assuage guilt for spectacular financial success by means not always bathed in moral glory. Well, maybe. But there appears to be something more going on. Accepting moral responsibility for the power that wealth delivers must also play a role. Being released from the shackles of complex, large organizations with multiple priorities may be another reason. Or is it a question of the enormous gratification – better surely than any number of diamonds or private jets – that must come with saving lives? Perhaps ensuring a positive social legacy is also a driver. There again, thy may just be in a position to do good, and willing and able so to do. This phenomenon of refocusing on public good post-career is not just a privilege of the private sector. Pop stars, and politicians, all represented ably at the Bill and Melinda Gates talk, have also been known to do this.

You do have to wonder though, if some of the people we deem the most successful in our society have ideas of philanthropy in later life, why don’t they get thinking about what they can do NOW, with the tools at their disposal. Why do many of us fail to adequately ‘do good’ during our day jobs? This was part of the discussion at a workshop I was involved in last Wednesday on Social Enterprise. This enigmatic concept broadly encompasses the idea of an organization that has social or environmental drivers as the PRIMARY goal. It is a huge phenomenon and is an area to watch in terms of research and, more importantly, its actual impact on pressing global problems.

Last Wednesday also saw the UK government announce the details of a strategic spending review intended to reduce the UK debt, which will cause a great deal of pain over the next few years. While the axe has been taken to nearly every aspect of public spending and the benefits and welfare system in our country, miraculously the investment in foreign aid has been pretty much spared. Though I didn’t spot him there, maybe the Chancellor was listening to the message from Bill and Melinda Gates. I sincerely hope a few business leaders will too.

Laura Spence

Photo by Johnny Vulcan. Reproduced under Creative Commons Licence

Microcredit as loan sharking?

Microfinance - the design and delivery of specialist financial services to poor consumers - doesn't often make it onto the front pages of the global media. So it was no surprise that the front page story about microcredit on the International Herald Tribune (and the New York Times) today ended up focusing on some of the industry's more unsavoury elements. Prime among these are the sky high interest rates that some microcredit organizations charge their low income customers - in Mexico, for instance, the average rate is currently some 70%, although the global average is around 37% (which is still considerably higher than rates for "normal" lending). Neil MacFarquhar, the NYT reporter lays the blame squarely on the takeover of microcredit by "a raft of banks and financial institutions", which he claims has got microfinance advocates "wringing their hands over the direction it has taken" and created a "fracas over preserving the field's saintly aura"

Such debates about the direction and financing of microcredit are hardly hot off the press. In fact, in our recently published Business Ethics textbook, we've written a case on Microfinance ("Targeting the poor with microfinance: hype or hope for poverty reduction?") that deals with exactly these concerns. Now we like to claim the book is cutting edge, but we don't expect to break the news ahead of the New York Times. Still, MacFarquhar's critique is timely in some respects in that it does at least put an important debate around microfinance in the mainstream at last. And it helps put to rest a little of the unabashed enthusiasm that tends to accompany a lot of discussion about microfinance. But in other respects, the article is rather uneven in its criticism and probably rather misses the point with its castigation of banks.

There are in fact three quite distinct issues at stake here. The first concerns what a fair price for poor consumers to pay might be in terms of interest rates. Microcredit consumers almost by definition represent a higher cost to serivce for financial institutions because they are difficult to reach and do not fit the existing banking infrastructure. As we say in our case, "providing financial services to the poor may not be as risky as once thought, but it remains expensive because of the large numbers of small transactions that need to be processed and the considerable resources that need to go into developing education and outreach services." This is why much microcredit began as a nonprofit exercise funded by donations. But when it comes to for profit providers, are lenders bound by a "fair price principle" that may not be in evidence in other markets? Isn't the fair price what consumers are willing to pay? Well, not exactly. Fair prices are those that are transparent, understandable, and where customers have an opportunity to switch. These are conditions that are not always met in microcredit markets, suggesting that some kind of addition protections may indeed be necessary to prevent exploitation.

The second issue is about what it takes for microfinance to really take off and go mainstream. First we derided banks for ignoring poor people. Now that microcredit organizations have shown that it can be profitable (and relatively low risk) to target them, we still deride the banks for greedily entering the market. But in reality, few large banks have yet to take up microcredit with much enthusiasm. And even those that have, typically only have a small percentage of their business accounted for with microloans. Despite what MacFarquhar hints at, microfinance is still not a big bank phenomenon and much of the microfinance world is still looking to further its inroads into the commercial sector to prove that its not just charity but actually good business as well.

And firnally, the third major issue is whether microfinance actually has any major effect on poverty reduction. This "fierce debate" as MacFarquhar terms it, is a crucial one for the long term complexion of microfinance, because without substantial impacts on poverty, microfinance has far less attraction to the development world (though it will stay in vogue for the finance industry whilst it maintains it sheen of profitability mixed with principles). And the truth is, the definitive answer to that one is still not apparent. In our case, we put it like this:

"The evidence on the impact of microfinance on poverty alleviation is limited. In part, this is simply due to the relative youth of the industry, as well as the very real problem of providing any definitive correlations given the range of variables involved in determining poverty levels. Despite numerous case studies of successful initiatives, hard empirical evidence is lacking.At best, the existing evidence seems to suggest that, on average, microfinance reduces vulnerability and dependence among client groups, even if it doesn’t necessarily make them richer."

Critics therefore suggest that efforts should be targeted at other approaches to poverty reduction whilst advocates, even in the absence of hard evidence, still endorse the more organic, inclusive and bottom-up approach to develoment represented by microfinance. This argument isn't likely to go away any time soon, but the need is clearly there to develop more sophisticated impact assessment tools to gauge its effectiveness.

So the upshot is, the picture is probably rather more messy than the New York Times presents it, but also somewhat more nuanced. Microcredit is not about big banks versus nonprofit providers battling for the heart and soul of a "saintly" practice, but about a form of lending that can and will be practiced in a variety of ways to serve a variety of ends.

‘Responsible Luxury’

If one takes a taxi from the airport in Bangalore, India, into the city, the first billboard you will see boasts the words: ‘Responsible Luxury!’ It's an ad for a hotel chain, presumably one of those that recently opened another 7-star hotel in the business processing outsourcing capital of the world.

Whatever this phrase means - it pretty much uncovers the enormous contrasts and ambiguities of the economic wonder in India, much of which are epitomized in the 8m population of Bangalore. On the one hand there are the shiny, super stylish office buildings – or ‘campuses’ – of many western and Indian MNCs which have made the city the world’s leading place for IT services and software development. Being on the premises of these companies feels a lot like being in an office environment somewhere in North America or Europe.

On the other hand, Bangalore is a typical ‘third world city’ with constantly jammed up streets, poverty, pollution and shanty towns. The difference between the luxuries of the ‘first’ and the plights of the ‘third’ world could be nowhere more visible.

Now, there are two ways of going about this gap. One option would be to just hermetically isolate those two worlds against each other. We mentioned this approach – referred to as ‘brazilianization’ - in another blog. By the looks of it though, this is not the way things are going in India. India is a long standing democracy, has a vibrant media scene and fairly strong civil society organizations. So what we see here is more an ongoing struggle between these two worlds.

It is interesting to see the role of business in this. For sure, there is a long tradition of business engagement for social needs in India. Companies such as Tata and others have a long legacy of philanthropy and many of the new IT ‘stars’ such as Infosys have followed their example. Talking to business people here one can see a sincere commitment to not just indulge in the luxuries brought along by a booming IT industry but rather make it trickle down to wider parts of society. Responsible Luxury, as it were. How good a proposition that is and if it works ... well, we'll just have to keep you posted.