Such reasoning is far too simplistic for these individuals, and surprisingly echoes the words of Lord Griffiths, Vice Chairman of Goldman Sachs, who said that “we have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all”.

Becker and Posner’s posts skirt around two key issues.

First, Becker says that pay had nothing to do with the crisis:

I have not seen convincing evidence that either the level or structure of the pay of top financial executives were important causes of this worldwide financial crash.

On this he is most certainly right. Yet, while pay may not have been a direct cause of the crisis, it was in hindsight a predictive symptom of it. Fundamentally, the crisis was caused by a breakdown in ownership of responsibility. Financial executives, traders, and bankers bought and sold instruments on which they did not own the risk and thus did not feel compelled to view the transaction and the hefty profits that came with it with a healthy dose of skepticism.

No doubt other factors contributed to that tunnel vision – including a blind belief in the correctness of financial wizardry. But an incentive structure that rewarded short-term gain and encouraged overlooking fundamentals certainly did not help.

Posner, for his part, at least agrees to the principle of reforming compensation structures. Yet, he also concludes that “regulating financial compensation is a mistake”  because it cannot be done within the bounds of reason. Even if escrow and clawback clauses were added to executive compensation structures “that would be too small an expected penalty to dissuade him from making the deal. The penalty could not be made sufficiently heavy to disuade him without depriving him of most of his current income.”

Unfortunately for Posner the rebuttal to his “it cannot be done” argument is right there. Why not deprive the executive of most of his current income? The case for doing that is a natural extension of the principle of risk and benefit sharing.

Bonuses were designed to reward employees and allow them to participate in the potential of their work and the performance of their company. But over the years executives have come to view bonuses as part of their normal salary with poor performance to be penalized simply by a lower bonus. This gain-only structure is incomplete and not how it was meant to be. The logical thing would be to have a bonus for good years and a penalty for bad years. The possibility of loosing money from ones base salary should be part and parcel of every compensation structure.

There are two good reasons for such a structure.

First, it helps avoid risk where it is not necessary. As Posner mentioned, financial executives are overpaid given that their pay is based on “speculative profits that are not net additions to economic welfare, because they are offset by the losses of the speculators on the other side of successful speculators’ trades.” Raising the specter of loosing money will minimize speculation and force individuals to consider the potential consequences – positive and negative – of their actions.

Second, it is fair. If executives can gain from better performance they should also loose from poor performance. That is the principle that investors accept on the stock market and entrepreneurs accept when they setup companies. Why should executives and employees be treated any different when things go sour on their watch?

How different is this philanthropist? And what does it say about philanthropy and society?

The first question is answered by Kramer himself, who sees this as a new approach that brings together four elements – taking responsibility for the change they seek, engaging others to build coalitions, using structures and partners from outside the non-profit sector, and creating knowledge to influence the behavior of others.

It would appear from this that what venture philanthropy did at the level of the institution, catalytic philanthropy does at the level of society. Venture philanthropy focuses on addressing the fundamental challenges facing institutions – lack of long-term funding, organizational limitations in expertise, etc. Similarly, the common thread amongst catalytic philanthropists seems to be that they are addressing a single societal challenge (such as meth addiction in the example used by Kramer).

Seen in this light the catalytic philanthropist is not new, but is still rare. Carnegie’s initiatives to address education, the Rockefeller Foundation’s support of research into high-yielding varieties of seeds, and the Gates Foundation’s efforts to address fundamental shortcomings in public healthcare in the developing world all follow that same trend to varying degrees. If that is the case the catalytic philanthropist is not that different from the subject of the book Philanthrocapitalism: How the Rich can Save the World.

The rise of such a philanthropist may be heralded as a good thing. But is it?

As Kramer says, traditional donors “delegate to nonprofits all responsibility for devising and implementing solutions to social problems.” But by putting faith in catalytic philanthropists, society also delegates responsibility for improving its lot to wealthy individuals, rather than to the elected representatives in government that are usually mandated that task of ensuring societal progress. That, certainly, cannot be a good thing for it implies that either governments have been unsuccessful in meeting society’s demands or that the ambitions of wealthy individuals exceed the capabilities of government.

The real reason for the rise of the catalytic philanthrocapitalist (to combine terms) is probably a mix of those two. But the correct response to a failure in governance is not to delegate the responsibility to another unaccountable individual. And the ambitions of individuals can just as easily do harm as good.

This is not to say that such philanthropy is bad. The basic premise that meaningful, long-term social change cannot happen via check-book philanthropy is correct. But when philanthropists engage in transforming society to match their visions, they must critically ask themselves if changing society is indeed their responsibility? And if they conclude that it is they must still be careful and understand there is a fine dividing line between visions and mirages.

Referring to the two Bretton Woods financial institutions, Keynes once wittily observed that the “Bank’s a fund and the Fund’s a bank.” Whether the IMF should continue to be a bank is being hotly debated. But it is in India’s interest to push the Bank to be less of a financial fund and more engaged in generating and financing ideas and technology for development.

It is refreshing to see this idea put forth so elegantly because the timing is right. As India and China rise in the world they have sought more influence over the world’s financial institutions. During the financial crises much attention focused on a potential future role for the IMF. But in an environment where the efficacy of aid has often been questioned, the World Bank is no stranger to questions about its future either.

Back in 2007 the WSJ had suggested that the bank be disbanded altogether given that it did little more than fund corruption. The same year Prof. Bhagwati suggested that the Bank be a think tank of 300, in contrast to the 8000+ it employed at the time. That is not far from what Subramaniam suggests today.

The premise is simple – that the World Bank suffers from an identity crises as a development aid fund. Its “core” business of financing development projects is irrelevant in fast-growing Asian countries that can access market capital. And in poorer countries where private capital is unavailable the Bank is only one of many players. And anyway, according to their research (see PDF papers here and here), development aid has no impact on growth. So, what is the World Bank good for?

Despite this evidence, the World Bank’s current lending practices overwhelmingly favor traditional lending to governments over global public goods. The numbers are difficult to pin down but global public goods financing is unlikely to exceed 20 percent of total World Bank lending. In other words, current practice is inversely correlated with the evidence. What makes this inverse correlation particularly egregious is that there are many suppliers of traditional aid (bilateral donors, NGOs, private philanthropy) but few suppliers of global public goods. The World Bank should be filling the latter empty space instead of further crowding the lending business.

Global public goods remain dangerously underfinanced, notwithstanding the massive amounts raised by the Global Fund and the Gates Foundation for public health. Research into public health, education, access to water, and climate change has been neglected or has often focused on the interests of the developed world. This explains, for instance, why the climate change agenda has focused so overwhelmingly on mitigation issues, rather than on adaptation or insurance against unavoidable changes.

Clearly, we need an “inventor of last resort” to finance research, development, and scaling of technologies that are necessary but for which there is no viable market return. Subramanian puts forward his suggestion as primarily of interest to India and other fast-growing economies. But his proposed realingment would be useful for most developing countries, given the substantial transformative power of such public good investments.

On the other hand, some of the biggest contributions to development have come from global public goods such as the green revolution and the medical breakthroughs, especially related to the development of antibiotics and vaccines. The technical discoveries leading up to the green revolution were financed by official aid and private philanthropy. And the adaptation of the green revolution technologies to varying climactic conditions across the developing world was actually undertaken in the internationally-funded CGIAR network of research institutions (including ICRISAT which is located in Hyderabad) that are now sadly in decline, in part due to international financial neglect.

Finally, this proposal makes sense because it is likely to do the least damage. If aid has no impact on growth at best and can seriously distort a nation’s economy at worst, is it not better to spend the money outside the country? Jagdish Bhagwati suggested as much in an Oped piece for the WSJ in 2005 (better formatted PDF here). Subramanian’s suggestion shows how that can happen in practice.

The need to finance public goods has never been greater. The technology gap between the rich and poor countries is expanding and that trend is only likely to accelerate as we move into a low-carbon economy. Countries with access to technology will reap the rewards of higher productivity, more adaptability, and a higher standard of living. Yet, those at the bottom of the scale will never form a viable market, and their needs will continue to be ignored. There is a strong case for the intervention of a relatively impartial international institution to both invest in the needs of developing countries and to coordinate their replication.

In the end, the success of this proposal will depend less on its actual value and more on the politics of aid. India wants to double the size of the World Bank, but it also wants a much bigger voice in its running. That can only happen at the expense of the Bank’s current masters. So the question is whether the world’s major donors will allow the World Bank to take on a new role, or by obstructing it will make the institution irrelevant?

The result: Today in India, some poor neighborhoods are being “carpet-bombed” with loans, says Rajalaxmi Kamath, a researcher at the Indian Institute of Management Bangalore who studies the issue. In India, microloans outstanding grew 72% in the year ended March 31, 2008, totaling $1.24 billion, according to Sa-Dhan, an industry association in New Delhi.

This development should hardly be surprising as commentators have long warned of the perils of too much credit chasing too few good candidates. That, and poor governance, were identified last by the MF Banana Skins 2008 report as key challenges for the future of the industry.

There is a parallel here with the sub-prime crises which had its origins in these same twin problems – too much credit and moral hazard on the part of those doing the lending (see this post for more). Yet, despite these problems, microfinance continues to grow.

According to the Monitor Institute microloan volume grew from USD 4 billion in 2001 to USD 25 billion in 2006. And new microfinance investment vehicles (MIVs) are going beyond debt financing to take equity stakes as well (e.g. the DWM Microfinance Equity Fund I closed this summer with USD 82 million from four institutional investors), illustrating a growing confidence in this sector.

An interesting observation is that loan volume growth seems to be outpacing actual investment growth by a large margin. While loan volumes were USD 25 billion in 2006, a CGAP brief estimates assets in MIVs in Europe and the US at only USD 6.5 billion. The remaining money must be coming from savings, public equity (e.g. Compartamos), philanthropic grants, IOs, and other public institutions. Nevertheless, MFIs must still be heavily leveraged to have such large loan books.

A second observation is that while private MIVs have the most incentive to ensure quality of microloans they also have the most incentive to charge higher interest rates. This is particularly so now that microfinance advocates have advertised themselves as a new and uncorrelated asset class resilient to the economic recession.

This makes microfinance doubly vulnerable compared to housing finance before the sub-prime crises. While the latter was only vulnerable to defaults from below, microfinance is also vulnerable to ethical pressures. Having sold itself as a “social investment,” microfinance cannot be seen to create indebtedness. Should that happen the flood of money in this sector will likely dry up quickly, putting pressure on the MFIs and in turn on the borrowers.

It is time that social investors and microfinance proponents scaled back their optimism – both on the impact of microfinance and on its investment potential. Microfinance cannot be immune to the basic rule of finance that risk and return are correlated. Moreover, such high expectations provide incentives to actually undermine both the social impact and potential returns of microfinance. An expectation of growth incentivizes providing loans even to those that cannot use them for anything other than consumption. And an expectation of higher or more consistent returns provides incentives for higher rates, which in turn can lead to indebtedness.

Microfinance investors may be doing damage to their own investments in this manner, by compromising the sustainability of the model. It is time for some realism, because regardless of whether microfinance is good or not endless growth cannot be without consequences – as the subprime crises showed.

He has a point. The recent climate summit came out with very little in the way of concrete actions, except a declaration of intent to keep global temperature rise limited to 2 degrees C or less. As international treaties go that is decidedly weak, particularly given the urgency of the issue with the expiry of the Kyoto Protocol in 2012.

The question, of course, is who will pay for a new framework. And it is here that Chanda is being unreasonable in placing any responsibility on the developing world. Quoting Figueres at the Taellberg Summit, he says the world must undergo three “decouplings.” The first two are particularly relevant.

Firstly, decouple growth from carbon emissions. Contrary to the common belief that reducing carbon emission is a costly undertaking, significant gains can be made through efficient use of energy. The development of renewable energy and associated technologies also opens up good business opportunities while mitigating the effects of climate change.

The second decoupling is essentially for developed countries. “We have to decouple our personal satisfaction from over-consumption,” he said, pointing to the carbon cost of excessive consumption of natural resources by the developed world. “In our world today, one billion people over-consume and are wasteful, and six billion people do not have enough.”

Nobody can argue that both decouplings are essential. The question, of course, is in which order should they occur? Should developing countries decouple their growth before having achieved higher living standards, even if the developed world continues with its profligate ways? More important, who will pay for these two decouplings? Should developing countries pay for adopting a low-carbon economy, even if it reduces their growth rates and in the process compromises their only defense (rapid growth) against climate change?

Chanda is right to point out that developing countries will suffer more from climate change, and India will suffer most. But as Thomas Schelling pointed out, “the best way for developing countries to mitigate global warming is through economic growth.” Yet, the developed world has so far put forward no substantive proposals, backed by serious money, to help poor countries adapt to or insure against climate change. Their entire focus has been on mitigation, so that the rich countries can avoid having to decouple their living standards from carbon emissions.

Given the unwillingness of the US and Europe to fund a low-carbon economy elsewhere, developing countries only have two options at present – to develop rapidly and ignore long-term impacts or to develop slowly at their own cost. Noone can blame them for taking the first option.

This is not to say that developing countries are inactive. India, a country often cited as being obstructionist in climate negotiations, is one of the largest producers of wind energy and earlier this year unvieled two major initiatives.

The first is to improve energy efficiency through ratings on a range of electronic goods, as well as benchmarks for various industrial sectors, and a “a trading scheme centred on energy efficiency certificates that could possibly expand to renewable energy. The plan involves creating a market-based mechanism that would allow businesses using more energy than stipulated to compensate by buying energy certificates from those using less energy or using renewable energy.”

The second initiative, still in the planning phase, can best be described as the most ambitious solar power project in the world. In late May, the Indian government revealed plans to harness 200 GW of solar energy by 2050. By 2020, India hopes to have 20GW of additional capacity at a cost of USD 20 billion.

Interestingly, and to demonstrate the fallacy in Chanda’s argument, the first is being paid for domestically – because it is economically viable and does not risk reducing growth. For the second, however, the Indian government stepped back from funding the upfront costs and may ask international sources to pay for it.

The Indian Solar Mission is a clear example of a developing country accepting its responsibility and attempting to decouple growth from carbon emissions. But such decouplings will be expensive once the low-hanging fruit (e.g. energy efficiency) have been taken. So if Mr. Chanda is serious and wants to see responsibility accepted where it lies, he should exhort developed countries to put their money where their mouth is. Then we can get on with the business of defining a post-Kyoto framework.

On July 16, Indian Prime Minister Manmohan Singh met his counterpart Gilani in an effort to restart the stalled peace process. Much has been said about the joint statement that was issued, which was criticised both for “delinking” action on terror from dialogue, and for iincluding references to Balochistan.

In the face of substantial criticism the Prime Minister stepped into parliament to give his interpretation of the statement. Yet, his explainations have been largely ignorant of reality.

The Delinking of Action on Terror

The Congress has defended the delinking of anti-terror actions from dialogue by presenting its own interpretation of the statement. According to the Congress the statement implies that Pakistan must act on terror regardless of the status of the stalled peace process. If that were the case one must ask then why the statement does not say just that? Why is it open to interpretation?

One possibility is that it was “bad drafting“. If that is the case heads should roll – starting with Foreign Secretary Menon himself. But the more likely, and more worrying, possibility is that the ambiguous wording was intentional. This would be consistent with Manmohan Singh’s assertion that he would go “more than half way” to find peace with Pakistan. Yet, it is dangerous to go anywhere when Pakistan has not even budged an inch.

The Inclusion of Balochistan

The second about face in the joint statement was the inclusion of Balochistan, something that has never been a factor in any past discussions with Pakistan. So why now? Mr. Singh’s naive explaination is that India has “nothing to hide.” But that is, as Kanwal Sibal stated, a moral argument, not a diplomatic one. Following that logic we should also have included Kashmir, FATA, and Afghanistan?

By including Balochistan Mr. Singh has shown an absolute ignorance of diplomacy and bargaining. And the results are already there for us to suffer. Within days of the statement Pakistani officials were accusing India of fomenting terror in Balochistan. In the words of Pakistani officials, Mr. Singh has allowed Pakistan to “externalize an internal problem.”

Pakistan has been immensely successful in doing so in the past, and nowhere more so than in making Kashmir an international problem. As mentioned by the Daily Times, ”after the Simla agreement in 1973, Kashmir had almost disappeared from the India-Pakistan discourse. But it made a comeback in the early 90s after India agreed to discuss Kashmir, interpreting it as discussing issues related to militancy and cross-border terrorism.” Now India has allowed Pakistan to do the same with Balochistan.

War, Peace, and Something in Between

Mr. Singh’s ambiguity in the choice of words and in including Balochistan may have been part of his bigger peace strategy. It certainly has strengthened Mr. Gilani’s position at home. Also, as some Pakistani news outlets have pointed out, delinking action on terror from dialogue with India may actually make it easier for Pakistan to act on terror – since it would not be seen as acting under pressure from India.

Nevertheless, by indicating to Pakistan that India is willing and desirous of peace, India has weakened its hand in future peace negotiations. Here, a few lessons on international negotiation are necessary.

First, by indicating that India is willing to reshape its foreign policy and go “more than half the way,” Mr. Singh has indicated that India is desperate for peace. And by doing this unilaterally, he has shown that India is willing to talk even on Pakistan’s terms. The words of that joint statement may be interpreted either way, but Mr. Singh’s actions in Egypt make one thing clear – that India will be willing to talk even after Pakistan foments terror in India. In other words, India wants peace at any price.

The reason for this is that, in Mr. Singh’s view, short of war dialogue is the only way forward for the two countries. This is a fair point. Yet, for this to work both sides must want peace and Pakistan does not. Instead, it has chosen to support a proxy war against India for the past several decades. In view of that, India should not seek dialogue with Pakistan. Rather, it should make Pakistan seek dialogue with India. This would be fitting, given it is Pakistan that must prove its good intentions. But by making utopian public statements that dialogue is the only way forward for India, India takes off the table options that Pakistan continues to retain and exercise.

If You Want Peace, Prepare for War

At the root of Mr. Singh’s peace initiative is the belief that both countries should be desirous of peace and that India stands to benefit from a strong and stable Pakistan. Yet, both assumptions must be questioned.

First, Pakistan is not desirous of peace with India. The belief to the contrary has been costly in the past. As noted by M.J. Akbar,

In 1965 Lal Bahadur Shastri thought a little give would purchase a lot of take at Tashkent. In 1972, Indira Gandhi bought Bhutto’s plea that what remained of Pakistan would crumble without her sympathy. She did not insist on a written agreement ending the Kashmir dispute along the Line of Control. Atal Bihari Vajpayee reached out to shake Pakistan’s hand at Lahore, and got slapped in the face at Kargil.

Second, history suggests that regardless of whether Pakistan is a dictatorship, democracy, or anarchy, the state will remain hostile to India. To believe that Pakistan will willingly disown terrorists it has long nurtured is naive when even American pressure has not weaned Pakistan’s establishment from its love of jihadis. The ISI and army continue to support Al Qaeda, Taliban, and Kashmiri terror outfits such as the LeT. And we must remember that the Mumbai terror attacks took place during Gilani’s reign.

The bottomline is that Pakistan cannot be trusted. And there is no reason to hope, as the PM appearently does, that Pakistan will change its behavior. In view of that, “it is Pakistan that must reshape its policy towards India, not vice versa.” Yet, if history is any guide, Pakistan is most likely seeking a detente till its troubles in the West have receded.

Nor should India try to prevent Pakistan’s disintegration by compromising on its own foreign policy. If Pakistan wishes to fail as a state, by breeding terrorists, that is its choice and India cannot (even if it wished) prevent that fate. The sole purpose of India’s actions should be to want Pakistan to speak to India, not the other way around.

Prime Minister Manmohan Singh has done exactly the opposite and weakened us in the process. Mr. Sibal said it well:

Past experience shows that Pakistan would construe our reasonableness as weakness, and those who would applaud our moderation would not stand by us when needed. The bane of our Pakistan policy has been our inability to stay the course whichever the party in power. In time, we begin to see our reasonable position as undue rigidity and, disregarding the lessons of the past, we are ready to commit the same mistakes again.

Mr. Singh’s embrace of Pakistan is another such insulting mistake. As Kargil showed, it is India’s soldiers that pay the price of the naivete of its political leaders. They did so with China in 1962, and with Pakistan at Shimla and then again in Lahore. It is time India learnt from its lessons. And the first step would be to remove the Prime Minister, who has no understanding of foreign policy, from any role in shaping it. Then, we can start shaping a foreign policy in line with our aspirations.

In Favor of Foreign Aid

Writing in favor of official aid Carol Lancaster writes that “The good works of charity and the impact of investment by entrepreneurs can also make a major contribution to helping the poor. But they are not able to do what governments can do. The impact of their good works is likely to be limited in the absence of public aid.”

This argument in favor of foreign aid is based on the FUD (fear, uncertainty, doubt) strategy pioneered by IBM, implying essentially that ”Yes, those people can do something, but without us you will not be able to achieve your objectives.” The argument goes that the problems are large, and require large scale assistance.

Yet, the size of financial transfers is one of the key objections to foreign aid. As several economists point out, it leads to the “aid curse” and to lowered productivity by stunting the private sector. Indeed, recent excitement that remittances are an effective tool for development is grounded in the understanding that they are small and encourage local consumption. So, while they are greater than total ODA, they avoid the problems associated with aid by being distributed.

That said, Prof. Lancaster does have a point. Most private philanthropists and companies in poor countries do not have the scale to deliver certain critical services, such as subsidizing millions of HIV anti-retrovirals, or providing humanitarian assistance in times of war and natural disasters.

For “Philanthrocapitalism”

On the other end of the spectrum, Michael Green’s arguments are equally polarizing. He puts his faith in what he calls “philanthrocapitalists” - the likes of Bill Gates, Mo Ibrahim, and Pierre Omidyar.

 The philanthrocapitalists’ giving will always be dwarfed by official aid. Yet their ability to lead, innovate and take risks means that they are our best bet for finding ways to make aid work. They are already using their expertise from the business world to find solutions to three big development headaches: stopping epidemic diseases like malaria, building a private sector and fixing failed political systems. Their success depends on the willingness of governments to work in partnership.

The key argument is that these individuals are more innovative and can take risks. Also, by applying principles from the private sector, they can find more efficient and effective ways to solve the world’s intractable issues.

At the macro level this argument suffers from two weaknesses. First, Mr. Green is simply trading one “big brother” for another. If big government cannot solve problems without substantial negative side effects, why would big philanthropy be any different? After all, both are a set of well-resourced interest groups that work outside the local institutional setup. As an example, the Gates Foundation has been criticiszed for having grown so big as to stiffle debate in the medical research community. And an article in the BMJ argues that the foundation’s “special brand of philanthropy is damaging health systems in developing countries and distorting aid priorities.” That sounds an awful lot like what you hear about government aid.

Second, Mr. Green’s faith in philanthropists rests on yet unproven ideas. For instance, he places a lot of hope in microfinance – yet few if any studies have shown that microfinance has any lasting developmental impact. And why is he placing so much faith in capitalism and the financial sector, when the sector has so obviously failed to guard the small investor over the past two years?

And finally, Green ignores Carol Lancaster’s key point – that philanthropic capital is simply not enough. For instance, the Mo Ibrahim Prize for good governance, while an excellent initiative to focus attention to the issue – is hardly likely to turn corrupt politicians into honest ones.

Conclusion

The debate misses the point. Neither foreign aid nor philanthrocapitalism are perfect. Foreign aid certainly works better in some areas. Yet, let us not pretend that it seeks anything more than political leverage or short-term solutions.

Green’s prognosis too is disappointing. He is full of praise for the philanthrocapitalist – yet puts too much emphasis on philanthropy and too little on the capitalist. If anyone will raise Africa’s standard of living, it is the local population. The deserving amongst them will go hungry, beg, borrow, and steal to climb up the economic ladder. The local government can help by not being an obstacle. That is how they did it in China and India, despite public aid. And they are doing it now in Africa, despite poor institutions. To suggest that Africa, or any poor country, needs some patriarch – whether a benevolent government or a benevolent philanthropist, is to continue to propogate the white man’s burden.

The authors conclude in their randomized trial of 52 (of 104) slums in India:

We show that the intervention increased total MFI borrowing, and study the e¤ects on new business starts, investment, and consumption. Households with an existing business at the time of the program invest in durable goods, and their profits increase. Households with high propensity to become business owners see a decrease in nondurable consumption, consistent with the need to pay a fixed cost to enter entrepreneurship. Households with low propensity to become business owners see nondurable spending increase. We find no impact on measures of health, education, or women’s decision-making.

There are several interesting results to be gleaned for this summary, but just as many questions.

Testing the Enterprise Hypothesis

The first interesting result is that microfinance seems to encourage, or at least enable, commercial enterprise. According to the survey the presence of microfinance helps to “create and expand businesses” amongst a subset of current or “likely” entrepreneurs. However, amongst the rest of the population, it tends to increase non-durable consumption.

The last part of this result is not surprising as anecdotal evidence has long suggested that microfinance works also to smooth consumption. What is surprising, however, is the high density of entrepreneurs in the target communities. A full 31% of households run a very small business – compared to the OECD average of 12%. This may seem counter-intuitive. Then again, the opportunity cost of poor households becoming entrepreneurs is extremely low, which may explain this result.

Testing the Development Impact

The survey also tests the impact on development indicators and finds no impact whatsover on health or education. While the MF as a tool for development argument has long ago been dropped by most serious MF proponents, this undermines it further. That said, as the authors note, it may be too early to conclude that microfinance does not enhance social outcomes. Rather, “after a longer time, when the investment impacts have translated into higher total expenditure for more households, it is possible that impacts on education, health, or womens’ empowerment would emerge.”

Open Questions

Unfortunately, the study seems to leave open several questions – and the report is missing several critical pieces of information.

First, it seems 69% of households in the baseline have outstanding loans at an average rate of 3.85% per month. What is the average loan amount and rate charged after the Spandana intervention and do loan rates come down? A key criticism of MFIs has been that loan rates seem to remain stubbornly high – is that true?

Second, what is the percentage of population that are likely entrepreneurs. In other words does microfinance, on balance, lead to greater enterprise or greater non-durable consumption?

Finally, and most important, the study says nothing about the failure rate of businesses. In the baseline, 30% of households have a business. Just how many of these still exist at a later point in time? Similarly, how many of the entrepreneurs that borrow, succeed?

This point is particularly relevant if you consider that existing businesses seem to register an increase in business profits of up to INR 5,000 – a 600% maximum rate of return in some cases. Such returns cannot be had without substantial risk, a monopoly, or some other market imperfection. So, where is the catch?

Conclusion

This survey is worth reading simply because it is the first real study on the impact of microfinance. It is interesting in that the results are intuitive – credit in the BoP world seems to work similar to how it works in the developed world. Responsible and entrepeneurial individuals use it to start businesses or save for the future. But many others use it to live beyond their means and may end up in a debt trap.

That said, the survey is also interesting in what it does not reveal about microfinance. While the inconclusive evidence on human development indicators can simply be a matter of time, it is a tangential issue. At the core of microfinance today, is its value proposition as a business incubator. There are as many questions on microfinance as a business itself that must be answered.

To be sure, President Rajapaksa has made the right noises – such as addressing the country in Tamil. Yet, there are ominous signs that there will be no quick return of Tamil civilians to normalcy. The latest of these is the news that the ICRC has suspended its work in the north because the government is denying aid agencies access to relief camps. Simultaneously, Sri Lanka has also arrested its own doctors, that had served in the warzone, for providing “false” casualty figures. This suggests that Sri Lanka’s government intends to control both the destinies of Tamils and the opinions of the Sinhalese for some time to come.

To be fair, what has been achieved in Sri Lanka is most remarkable. Seldom in the history of the world has a dissident terrorist and militant movement been so strong and yet been defeated so quickly. For this the credit (or discredit) must go to the government of President Rajapaksa, which used the LTTE’s atrocities “as a license for its own abuses.”

Certainly, the LTTE’s own actions in the last days of the war showed it to be no more than a terrorist organization and the passing of Prabhakaran and his ilk should not be mourned. But in managing the aftermath Rajapaksa can learn from the experiences of Israel and India before metting out a collective punishment on those Tamils strong and lucky enough to survive.

The Palestinian community has no state to call its own, but is spread out across Gaza and the West Bank, as well as in Egypt and Lebanon. In order to keep alive international claims for a separate Palestinian homeland, Arab States have denied these refugees citizenship or resettlement. As a result, Palestinians live 2nd-class lives and their ghettoization, to which Israel contributes substantially in the Gaza strip, engenders violence and anger against Israel and its allies both inside those camps, and out.

India’s handling of militancy in Punjab provides a more positive example. That movement was also silenced by the gun. But it was similar to the LTTE in that both were financed by diaspora abroad. Khalistan was funded by Sikhs in the UK, USA, and Canada. Eelam was funded by Tamils in Europe and North America.

While counter-insurgency was responsible in defeating militancy militarily, peace was won through political negotiations, a quick return to full civilian control, and by equipping a war-weary population with the tools for growth. As a result, even though support for Khalistan remained high abroad, it ebbed locally.

Sri Lanka may yet face a similar challenge because Tamils abroad are not yet ready to surrender. And no matter how hard it tries to weed out LTTE members, Sri Lanka is sure to miss some. To ensure that those that do escape remain marginalized, Sri Lanka must ensure that the bulk of the Tamil population moves forward and is not stuck in relief camps.

Sri Lanka would do well to show grace in its hour of victory. This is not a time to be searching for LTTE cadres but to prevent another LTTE from forming. To do so, President Rajapaksa should move the “biggest hostage operation” from rescue to relief. He can start by providing relief agencies unlimited access and funding.

There is a risk, of course. War crimes were probably committed on both sides and those of the government will surely come to light. For a State that has silenced dissent for so long that prospect is no doubt unsettling. But this too may be good, for a little introspection may go a long way in aiding reconciliation.

The irony of this war is that both sides purported to fight to “liberate” the Tamils. The LTTE wanted a Tamil homeland while the government called its endgame the largest “hostage rescue operation in history.” Oddly enough, they both killed, shot at, and bombed those very civilians they claimed to serve and protect. Well, the Tamils have now been liberated. If the LTTE defined the past, Sri Lanka’s government has the opportunity, indeed the obligation, to define the future of Sri Lanka. With such an overwhelming victory and public opinion in its favor, it also has the tools to do so.

To track this changing landscape, the THD (Technology, Health, and Development) Blog has reinvented itself as Global Health Ideas. Aman, the blog’s co-founder, gave this reasoning for the shift:

Because of increased attention and scope we decided it was time for a more permanent home that would also allow us to do more. We are still going to be blogging about global health solutions, innovative projects and the use of technology.

I’ve been following (disclosure: and occassionally blogging) on the THD Blog for a few years. It is an excellent resource that takes a practical perspective on health issues – looking at innovations that have the potential for real impact in developed and developing countries. If it relates to health, it likely will be discussed on this blog. And this week Aman and his co-conspirators will also be live blogging from the Global Health Council’s annual meeting in Washington, D.C.

Head over to get your dose of health ideas.