Foreign Aid - The Debate

I am returning from a long hiatus. While I work quite a bit of hours, I can't say that the hiatus resulted from a higher workload. I have traveled for work quite a bit in the past few months, but I can't say this directly contributed to my lack of motivation to blog. I guess I have no real excuse, but I am back and I hope this post will serve to start a discussion.

A few weeks ago, the head of the international development practice of my firm visited from DC. He did a whirlwind tour of Delhi, Mumbai and Chennai. We set up meetings for him with NGOs, diplomats, law firms, and entrepreneurs. When he was in Chennai, we began an interesting debate, which has stayed with me since. Foreign aid and its purpose. Let's face it, funding for foreign aid is one of the first things on the proverbial "chopping block" when a government tries to reduce spending. The debate of governments' responsibilities to their citizens vis a vis foreign citizens inevitably ensues.

Questions of "why should we pay for the building of schools and hospitals in less well off countries, when our own schools and hospitals are struggling with shrinking budgets?" "Why if country X has a perfectly functional government, should we help pay for the poor children of country X to read?" "We have lots of problems at home, why should we support foreigners' whose government is not capable of or does not care to adequately support them?" All are perfectly reasonable questions.

Here are a few other things to consider - poverty alleviation, improving education, and job creation are both domestic and international issues. While we hope and work towards improving the situation at home and abroad the situation not ever be perfect. However, a wealthy country's purchasing power abroad is much higher than at home. The impact of a bit of aid coming from a wealthy country is much higher than at home. If we can help using relatively little funding and make a big difference to multitudes, why not do it? Foreign aid, when administered through cooperation with the beneficiary government is good foreign policy, which results in improved bilateral relations. I know this may be a bit simplistic, bu better relationships between countries lead to trade, which results in job creation jobs and economic growth on both sides of the border.

UK and India

In the past few months, UK and Indian press have been replaying a quote by Pranab Mukerjee, India's Finance Minister saying that British aid is no longer necessary and is "peanuts." The quote fueled controversy in the UK over the role of DFID, British aid agency, in India - the top recipient of British aid. By the way, this quote is actually from 2010 and was taken up by two MPs who are making the argument for a reduction in British foreign aid.

Sure, India's economy has shown robust growth, growing up to 10% a year. Was no one really left behind during this blockbuster economic growth spurt of the past five years? The latest data released by India's Planning Commission indicates that poverty in urban India declined by 20.9%, in rural India by 33.8%, and at all-India poverty level declined to 29.8%  in 2009-2010. While states such as Himachal Pradesh, Madhya Pradesh, Maharashtra, Orissa, Sikkim, Tamil Nadu, Karnataka and Uttarkand saw a decline in the poverty ratio of 10 percentage points, states such as Assam, Meghalaya, Manipur, Mizoram, and Nagaland saw their poverty ratio increase. Bihar, Chhattisgarh and Uttar Pradesh have only seen a marginal decline in the poverty ratio.


However, these census figures do not capture the whole picture. For example, data shows that minorities and marginalized community groups - scheduled castes and scheduled tribes - still predominate the least well to do. Casual or temporary laborers in urban areas - those that come to cities for better opportunities - also have a very high incidence of poverty. According to the data released by the Planning Commission, poverty among casual laborers in Bihar is 86%, Assam is 89%, Orissa is 58%, Punjab is 67.6%, and West Bengal is 53.7%. Data released by the National Sample Survey Office (NSSO), indicates that while 2009-2010 is characterized by significant economic growth, this type of growth generated a rather small number of jobs. Furthermore, while the number of temporary workers grew by 21.9 million, the number of regular or full time workers only grew by 5.8 million, meaning that people have less opportunities to find stable and steady employment.

The last piece of statistic I wish to bring up is the measurement of inequality. Latest data released by the Planning Commission indicates that all-India inequality worsened - the Ginni coefficient (which measures inequality) went from .35 to .37.Inequality worsened in rural areas of ten states and urban areas of 18 states across India. If you want to compare to inequality in the United States', the Ginni coefficient in the US in 2009 was 46.8.

So we can see that while overall poverty declined, a closer look at the data indicates that India is experiencing a widening of the space between the proverbial "haves" and "have-nots." True, India is one of the world's fastest growing economies, with immense yet-to-be-realized potential, is home to the largest number of billionaires, but it also home to a large population in need of home and foreign government assistance.

Sorry, I veered into India-specific statistics, but I feel there a case to be made for foreign aid to the world's most vulnerable. What do you think?

Sources:

       Gilligan, Andrew “India tells Britain: We don’t want your aid” The Telegraph 4 February 2012 <http://www.telegraph.co.uk/news/worldnews/asia/india/9061844/India-tells-Britain-We-dont-want-your-aid.html>

2.       Mehra, Achal “Let them eat cake” Little India 16 March 2012 <http://www.littleindia.com/commentary/12376-let-them-eat-cake.html>

3.       Mishra, Asit Ranjan “Fewer poor, but still a long way to go” LiveMint 20 March 2012 <http://www.livemint.com/2012/03/20003512/Fewer-poor-but-still-a-long-w.html?h=A1>

4.       Padhamanabhan, Anil “Poverty falls, but inequality worsens” LiveMint  20 March 2012 <http://www.livemint.com/2012/03/19225906/Poverty-falls-but-inequality.html?atype=tp>

Consumer Urges

Ever wonder how you go to the grocery store with a list and come back with lots of unplanned purchases and a much larger bill? This really applies to any sort of shopping - clothing, electronics, toiletries, and souvenirs.

When my husband moved into my lovely DC share in Dupont Circle we talked about food shopping and budgets. He knew that grocery shopping ranked lowest on my list of things that I don't like doing but need to do in order not to starve. Yes, for me grocery shopping ranks below cleaning the bathroom. My husband had a brilliant idea, developing the grocery store map! Yes, it may seem funny at first, but hell it works. He scoped out my favorite grocery store, Trader Joe's - ah I miss it so - and created a map of the store based on the things that we usually need and buy. He spent a few hours compiling the map, but it made shopping a lot less excruciating and expensive. Each time we would go to TJ's we would create our shopping list on this map - putting fruit and veggie, hummus, and meat in the corresponding spots on the map. I mean, sure you still buy things impulsively, but mapping out your grocery list created big savings in time, stress, and financial management.

A whole science exists on how things are placed in your local grocery store. Store owners tend to place most expensive items at eye level, while less profit generating products at customers' feet and at tops of shelves. Store owners tend to group complementary products together as customers will buy more products - you know how salsa and chips always end up conveniently located next to each other? You know when you come into the store after work and you encounter that divine smell of fresh baked bread - yes, it makes you hungry and more likely to buy more food. Ever notice how staple goods like milk, cereal, bread and yogurt are at the back of the store - right, that's to make you walk through entire aisle's worth of stuff that you really don't need to get to the essentials. If you are a fan of Trader Joe's you will notice the kiddie sized shopping carts and the wonderful scavenger hunt offered for kids -  they entice pint size consumerism! My favorite is the selection of a variety of trashy and not so trashy magazines with gum and candy next to the checkout clerk, standing in line longer encourages a greater number of poor buying decisions. I mentioned a few strategies used in placing items in a supermarket, but there are obviously many more ideas on how to get consumers to spend more time and money in shops.

There are a few instances where I observed a number of really interesting business models of store managers/owners maximizing our instincts to shop. First, I have a friend from undergrad which loves and raves about this wonderful supermarket which she and her husband discovered in upstate New York. They live in the city, so driving to the supermarket is already a sunk cost. Once there, as a consumer, you will want to maximize your time and buy everything in one place. This supermarket had a snakelike layout. My friend raves about the fact that the whole store is made up of one winding aisle, thus relieving the anxious consumer of the stress of running between different specialty aisles. Brilliant! Consumer walks through and sees all the offerings of the store; not completing their trek through the store will mean that they will never get out. From the store owner's perspective, by forcing all customers to look at every item they have on offer will encourage a greater number of impulse buys, thus maximizing his/her return on investment. I don't feel its great for the individual consumers, but from a marketing standpoint, this idea is pure gold, ahem...literally.

Second, in Chennai, I have had to also stop and appreciate marketing brilliance of a retail business idea. Meet Anokhi, my happy place. This two story compound appeals to four shopping tendencies among young upper middle class women; clothing, home textiles (nesting), jewelry, and coffee/dessert. The Anokhi compound houses a clothing and home textiles store on the ground floor and a jewelry/tchotchke/cosmetics and coffee shop on the second floor. They have been expanding the ground floor for another retail venture, which I feel will just enhance the draw of the shopping compound. A deceptively simple idea shines in its brilliance. I mean think about it, you want to meet a girlfriend for dessert and coffee. Inevitably, one of you will be running late. Sure, there are newspapers at the coffee shop, but who will peruse the news if you can peruse the latest offerings in beautiful prints and organic cotton? Gotcha! The more late your girlfriend runs, the more likely you will buy something.

Alternatively, you are American and don't want to make your friend wait, so you arrive early. The clothing and textiles store is on the ground floor, thus you have to pass it on the way to the coffee shop, since you are early, why not stop and browse right? Lastly, on the way to the coffee shop you have to pass the tchotchke, jewelry and cosmetics shop on the second floor - who can have constant iron will not to want to spoil oneself just this once, right? I take my hat off to the designers of Anokhi, they definitely get what drives our consumer urges.

My Frenemy: the Auto(rickshaw)

Oxford dictionary defines frenemy as "a person with whom one is friendly despite a fundamental dislike or rivalry." Meet my ubiquitous frenemy - the auto and its fearless driver. You will find my frenemy prominently displayed above the text.

Things between Chennai auto drivers and I, are complicated. We maintain a symbiotic relationship - I use their driving services to get to places in lieu of safe public transport and the auto drivers try to skin as many rupees off me as possible. I am not saying Chennai auto drivers only try to skim as much as possible off my humble person: no, auto drivers tend to maintain democratic standards - they attempt to fleece everyone equally.  In the Lonely Planet's India country guide - Chennai auto drivers are affectionately described as sharks.

To be fair to these distinguished professionals - auto fares in Chennai are currently artificially low. The government has not allowed auto drivers to raise basic fares for many years, resulting in auto drivers negotiating fares in lieu of using their meters. Furthermore, recently petrol prices began to steadily increase as a result of the Indian government's removal of petrol subsidies, further reducing the auto drivers' profit margin. These circumstances lead to a unique challenge as a consumer of auto services - one must learn accurate fares for various destinations as quickly as possible. Failure to do so results in grossly overpaying and acquiring the reputation of a consumer that grossly overpays for auto services.

Over time my frenemy has developed an interesting business model of calculating fares. Each driver bases fares on answers to the following questions:

1. Does the potential passenger look like they come from Chennai? In my case, the driver assumes I am a tourist - the biggest prize to fleece. I do not blend in - making the case that I know fares and my way around this city - is particularly difficult.
2. Is he or she in a hurry? Showing stress, impatience, and fear will raise the fare accordingly.
3. Is it raining? Alternatively, is the potential passenger sweating profusely after spending a few minutes in the blazing sun? Fares fluctuate depending on the strength of the rain or heat/sun.
4. Does the passenger speak Tamil? Sadly, my Tamil skills melted into the haze, the only exception -  I am can still give directions and bargain in Tamil.
5. Are there other autos around? Fares fluctuate according to the number of other auto drivers hanging around. However, if other drivers decide to help their buddy negotiate, the passenger loses ground quickly.
6. Is it after 10 PM? Fares at night arbitrarily rise. If there are no other auto drivers around, your bargaining power does not exist.
7. Is the passenger a regular customer? A passenger that engages an auto driver regularly, contributes to the auto driver's income regularly, thus creating a disincentive to fleece more than acceptable.
8. Does the passenger have change? Lack of change will result in very expensive auto rides as, inevitably, no auto driver is willing to part with his change - most claim not to have any change even as early in the morning as 7:15 AM.

I generally like the auto guys that hang out across the street. We agreed on prices to my yoga place and work. The drivers at the auto stand down the block from our house will usually give us really crappy deals, thus I stay away from that auto stand. I usually return from work during rush hour with many autos passing my office-building and tend to negotiate with moderate success. To avoid very expensive auto rides, I've began hoarding change, which makes my wallet really full - even though I am not carrying much cash in terms of absolute value. I've generally failed at negotiating rides that take place less regularly even if I need to go pretty close to my house. Every new route, even if the auto driver I am negotiating with knows me and takes me somewhere on a regular basis, turns into an epic battle of the wills. Since I am usually in a hurry and running late, I lose.

I've recently noticed that I have a much less sunny personality when negotiating fares, but a girl must do what a girl must do, to get from point A to point B.

In the great words of Ostap Bender of The Golden Calf by Ilf and Petrov:

"Автомобиль не роскошь, а средство передвижения" = "The auto is not a luxury but a means of transportation"

Since we are still waiting for our car - rumor has it we will get it soon - I live to fight...I mean negotiate, another day.

Working in the local economy - not impossible and rewarding

So here I am, on Saturday following in my mother's footsteps - I am using amazing Trader Joe's Brownie Truffle Baking Mix to bake. I am not sure TJ's will appreciate this, but my mom made some substitutions. A few years ago my mother one of her moments to brilliance and replaced butter with Disaronno which resulted in out of this world fluffy, light and delicious - sadly not kid friendly - brownies. Thanks mom! Unfortunately Disaronno is unavailable in our commissary I had to substitute with Baileys and am experimenting with adding little pieces of pineapple for a little zing. While mixing the brownies I found myself musing about where I am and what it all means.

While my browser is open to about 20 different Indian microfinance articles - the subject of my next past - I want to step back and think about my life. When my husband decided to join the foreign service, I was rather apprehensive. We were getting a great life - my husband his dream job and we both would get a chance to explore the world in ways that many people cannot even fathom. Great! So here is the hitch, my own job prospects and earning potential would plummet as we crossed the border. You think unemployment in the US is bad - as far as I remember from my spousal orientation session out of all spouses and partners that want to work, about 45% actually succeed in securing jobs. However, I make up a tiny positive part of that statistic, because I am part of the tiny minority that works in the local economy. When asked about local employment, most people sigh and say that finding a job is impossible and working in the local economy turns out to be more difficult lower paid than its worth.

I am here to present the opposite case. Working in the local economy has its tradeoffs and is not for everybody. Personally, I feel I traded pay and vacation for my dream job. In the local economy you don't get both local and US holidays. Your pay, will likely not much lower than you are used to. I mean hell, I think I make less than a pimply teenager flipping burgers in DC. However, in my opinion, if you are willing to look at working in the local economy the payoffs, are tremendous. You can find your dream job, you can reinvent yourself professionally and your education and skills if you are outside of Western Europe - lets get real how many diplomats get to serve in Western Europe - are in high demand!

When I worked as a consultant in DC, I met with my former employer's India expert. She condescendingly informed me that my job prospects were severely limited. According to her, the best I can do for myself in India; teach English and write press releases for a company with business interests in the West. I was devastated, but when I got over the ego blow, I thought logically. I have a MA in international economics from a top tier US graduate school. English is one of two of India's languages of business, surely more opportunities exist in addition to teaching English? I worked really hard. I got out of my shell and networked like a crazy person. I spoke to anyone willing to listen and think about job options in India. I learned about the local job market. I learned about bilateral employment agreements - especially the one between India and the US. I bugged the local mission about work permit procedures. I went on informational interviews.

Finally I hit my professional jackpot - I was connected with a SAIS alum at a DC economic consulting firm and he passed on my resume to the firm's office in Chennai. The alum and one of the senior staffers from the India office interviewed me in DC and offered me a job - as an economist! This all happened before my arrival, so I advise; fulfilling your professional dreams takes time so its never too early to start. While the spouse trains in DC, the capital of networking - talk to people, think about your options, contact your mission's community liaison officer and local US trade representative. I love that I get to get out of the community to do something both challenging and rewarding. I am growing professionally and am satisfied with my choice.

With that said, I could not have done it without a few wonderful people. First of all my loving, supportive and patient husband - he was there cheering me on even when I felt completely insecure.  My wonderful co-worker from my DC consultancy - who is now getting his MIPP at the Kennedy School at Harvard - who connected me with a SAIS alum at my current job. The SAIS alum that made time for me and passed on my resume to the firm's Chennai office. The US Department of Trade officer and his spouse who both pointed me in the right direction, provided me with local economy information, salary levels and negotiation options, and took me step by step through an Indian employment contract, and supported me in my endeavors - even though they knew me via email. I could not have done this without kind and supportive people that I met in my journey to Chennai.

My point - don't give up your dreams and ambitions and settle. Look at your choices and frankly weigh each option's pros and cons. Don't let people tell you that you are not good enough and finding what you want is impossible. You have choices as a diplomatic spouse and choices outside of the mission might be more interesting and rewarding than you expect.

Microfinance in India Part 1

I read an article in The Hindu last week about the state of Tamil Nadu shielding its women from exploitative practices of Microfinance institutions. I found the content of the article thought provoking. While, I understand the economics of microfinance, I am only learning about India’s microfinance sector, thus the following post is heavily sourced. At the end of the post you will find sources which I used for this post.

Introduction and History

 

Some of you may have read about the microfinance credit crisis in India’s state of Andhra Pradesh in 2010 as well as the recent retirement of Mohammad Yunus, a Bangladeshi financier that created one of Asia’s most prominent micro lending institutions – the Grammeen Bank. India’s regulatory authorities, both state and national are working on instituting a package of new regulation which is supposed to both protect the consumers seeking micro loans and create a regulatory environment within which the micro lending industry will thrive.

I felt that to learn more about microfinance in India, I first needed to delve into the modern history of India’s financial institutions and regulatory framework. India’s experiences with establishing and regulating its financial sector created the environment within which social entrepreneurs established India’s micro-lending institutions in the late 1980s.  To understand India’s banking and regulatory legacy, I looked at the Economist Intelligencer Unit, IMF reports and Elizabeth Rhyne’s illuminating article on Huffington Post. Elizabeth Rhyne is the Managing Director at the Center for Financial Inclusion, Vaneet Rai of the Harvard Review Blog and others. 

Background 

Since India’s independence in 1947, the country carried out three major initiatives that shaped the country’s banking sector. The first took place in 1955 when India moved towards greater public ownership of banks, when the Imperial Bank of India was taken over by the government and renamed into the State Bank of India. The State Bank of India took over seven banks and its subsidiaries in 1959. In 1969 the Indian government nationalized 14 more private banks. The idea behind nationalizations was prevention of concentration of the financial sector within a few private hands and promotion of a balance of financial development. 

Following in Ghandi’s goal of self sufficiency, the government took steps to ensure that the financial sector provided enough credit to agriculture (especially in underdeveloped rural areas), export and small scale industries. While in 1974 the Reserve Bank of India issued guidelines indicating that both private and public banks must allocate at least one third of its credits to priority sectors indicated above, this requirement was increased to 40% in 1980. Heavy regulation of the banking sector lasted until the liberalization of the 1990s. Liberalizations of the 1990s removed controls on interest rates, liquidity ratios, entry barriers, relaxation of credit controls, and more. 

Microfinance: Background

The idea of micro-lending comes from the broader idea of financial inclusion. In other words, all people rich or poor need access to affordable financial services to conduct daily activities. When we think of banks we think of the types services they provide to customers; such as opening checking and savings accounts, obtaining credit cards, as well as loans to go to university, buy a house or a car. All banking services come at costs which are split between the bank and its customers. To issue a loan, the bank will need a lot of paperwork, including but not limited to establishing the customer’s identity, collateral, creditworthiness and the ability to repay the lent amount. Based on available background on the customer and health of the credit market, the bank will decide how much interest to charge. The amount of charged interest will bring the bank some profit, cover the risk of lending capital and cover the cost of administering the loan.

However, there are customers that both need tiny loans and are high risk borrowers. These potential customers are not likely to be part of the traditional financial system, may not have a credit history, collateral, and may not look like good candidates for a regular bank loan. Additionally, if the loan is small enough a regular bank may have no interest in processing it as administrative costs may turn out to be higher than the return on the loan. 

As a result, these customers tend to obtain loans from informal sources, such as the local moneylender. Micro-lending institutions come in to fill this gap and extend financial services to those customers.  In issuing loans, micro finance institutions use traditional social structures and higher interest rates to mitigate risk from such customers. These institutions lend to groups, which means that both administrative costs are lower per capita and overall loans tend to be larger overall. Microfinance institutions’ interest rates are higher than traditional banks to mitigate higher risk customers who often lack collateral. The majority of beneficiaries are in rural areas, where traditional banking services are far from villages and are part of close knit communities. Lending to a group within a close knit community provides social pressure on individual members of the debtor group to pay on time. Groups that fail to repay communal micro-loans do not get new loans, thus hurting the long-term prosperity of the group. As in the case of Grameen Bank, groups applying for loans go through months of financial planning courses, mitigating non-repayment risk further. 

While this is not the case in India, in some parts of the world, microfinance institutions take bank deposits, thus giving poor communities a way to buy into the success of the micro-lending institution. If groups that borrow from a micro-lending institution also have savings accounts, they give themselves a strong incentive to pay back their loans. Failure to repay a loan will not only mean a denial on the next loan, but also a higher chance that their lender will go out of business. If a micro-lender goes out of business, the community’s savings held at the same bank disappear with the lending institution. From a business development perspective, providing financial services to a group of people previously not part of the financial system, not only gives more income flexibility to this group, but brings a previously untapped source of customers for micro-lending institution – in other words more customers is good for business. This leads to a question, are MFIs in this line of work for the good of the people or business? 

Microfinance: India

After a number of nationalizations of India’s banks, the Bank Penetration and SHG-Bank Linkage Program was created in order to both maximize the increase of the reach of banking services to remote areas and incentivize people to use state banking services instead of more informal traditional financial sources – moneylenders.  The program succeeded in bringing financial services to remote areas and in fostering economic development. 

Andhra Pradesh of the late 1980s emerged as the poster child of success of this government program. This state worked together with the Indian government through SGH-Bank Linkage Program and the National Bank of Agriculture and Rural Development, NGOs, as well as the World Bank towards economic growth. As a result of this success Andhra Pradesh became birthplace of India’s robust microfinance sector. Ultimately, nationalizations and banking policy prior to the reforms of the 1990s resulted in preferential treatment of public sector banks and SHGs. 

In my next post, I plan to cover the development and growth of India’s micro-lending sector and how India’s regulatory framework promoted lending and growth within this sector.

Sources:

1. 1.      Gupta, Poonam, Kochhar, Kalpana, and Panth, Sunjaya. “Bank Ownership and the Effects of Financial Liberalization: Evidence in India.” IMF Working Paper. 3 March 2011 <http://www.imf.org/external/pubs/cat/longres.aspx?sk=24695>
2. “India: Demand for Financial Services.” Economist Intelligencer Unit. Main Report: Finance 2010. <http://www.eiu.com.proxy1.library.jhu.edu/index.asp?layout=displayIssueTOC&issue_id=187333003&publication_id=690002069> 
3. Kannan, Ramya. “State to Shield Women From Microfinance Institutions,” The Hindu. 8 March 2011 <http://www.thehindu.com/news/states/tamil-nadu/article1518093.ece> 
4.  Pankaj Kumar and Ramesh Golait, “Bank Penetration and SHG-Bank Linkage Programme: A Critique” Reserve Bank of India. 19 June 2007. <http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2029> 
5. Rai, Vineet “India's Microfinance Crisis is a Battle to Monopolize the Poor” Harvard Business Review Blog , 4 November 2010. <http://blogs.hbr.org/cs/2010/11/indias_microfinance_crisis_is.html> 
6. Rhyne, Elizabeth. “On Microfinance: Who's to Blame for the Crisis in Andhra Pradesh?” Huffington Post. 2 November 2010 <http://www.huffingtonpost.com/elisabeth-rhyne/on-microfinance-whos-to-b_b_777911.html >