The Future of Microfinance: Community Knowledge Programs

This is exactly where the future of microfinance lies: using technologies, which are increasingly diffuse in the developing world, to innovate and create value. And in the twenty-first century value is derived primarily from information, a theme echoed throughout the business community for some time now. The process of aggregating knowledge and allowing for the grassroots distribution of relevant information is a key step forward for the microfinance community. Below is an except from the executive summary of the pilot report, which can be found here.

"Grameen Foundation’s (GF) Community Knowledge Worker Initiative is based on the belief that a distributed network of intermediaries, or Community Knowledge Workers (CKWs), can use mobile devices to collect and disseminate information to improve the livelihoods of smallholder farmers. The CKW Initiative relies on mobile devices as a tool to extend the reach of centralized expertise through “feet in the field.” Such local intermediaries are crucial for contextualizing knowledge and providing a channel to effectively represent the voice of the farmer."

"Through a planning grant from the Bill and Melinda Gates Foundation, GF implemented a nine-month Test of Concept in Uganda focused on answering key questions to further develop, test, and refine the CKW model and gain strategic insight on how to scale the project. During the pilot, which began in December 2008 and ran through August 2009, Grameen Foundation prototyped mobile information services and conducted mobile surveys using various technologies. In partnership with local agricultural organizations and MTN-Uganda, the CKW team recruited and trained over 40 CKWs and laid the groundwork to extend the CKW network across Uganda. CKWs completed over 6,000 surveys and had over 14,000 interactions with smallholder farmers."

Home-Based Businesses and Gender Equality

In a paper that’s particularly relevant to microfinance institutions, Mohammad Amin provides anecdotal evidence from several African nations indicating that working from home is comparable in terms of labor productivity with employment outside of the home. Even more interestingly, there seems to be no disparity in labor productivity between men and women.

One would intuitively think that in nations where there is such a strong patriarchal culture women would be at a disadvantage when working from home, having to balance domestic responsibilities in addition to their business affairs. Thus, it seems that either the women surveyed were significantly more productive or efficient than their male counterparts, or, more importantly, it could suggest evolving gender roles towards a more progressive balance of domestic responsibilities between the men and women in a household. If this is the case, it could have significant implications for the evolution of culture and gender relations in developing African nations, which in the past have been among the most stratified in terms of gender equality. Indeed, this may serve as a testament to the empowering capabilities of access to capital, strengthening the case for microfinance institutions as a catalyst for progressive gender dynamics.

Managing Economic and Political Liberties

As another point of juxtaposition, a Financial Times article published anonymously argues the case that economic supervisors need not slow down the Chinese economy at all. While citing the same problems faced by the Chinese economy – state banks and local governments that aren’t accountable for losses, the potential for a real estate bubble, etc. – the article points out a different worry: that Chinese consumers haven’t been consuming. In order to achieve some semblance of a trade balance, not only is some time of Renminbi revaluation necessary, but the Chinese government must encourage consumption spending.

The implication of this, as pointed out in the article, is the predicted political effects of more empowered customers. This particularly seems to be the case with the diffusion of technology, and especially with information technology and telecommunications. Allowing Chinese citizens unprecedented access to information, especially from international sources, and facilitating a greater degree of almost instantaneous interactivity between diverse interest groups poses a strategic threat to the way the Communist Party manages the state. How the Party will manage the relationship between increasing economic and political freedoms is the fundamental problem facing the Chinese government today.

The article in full:

Even in good times, an economy that manages to grow at 11.9 per cent annually – as China’s did in the year to the last quarter – will turn heads. With a global slump barely behind us, it takes one’s breath away. What lessons can be drawn from China’s achievement?

First, it removes any doubt that government stimulus policy can work. Naysayers in Washington who claim the contrary may want to pay a visit to Beijing. The latest bounce in China’s economic output was not driven by net export growth. In fact, the trade surplus shrank in the first quarter and briefly turned to deficit in March – the first time this has happened in six years. Instead, the growth resulted from a massive increase in infrastructure lending.

Is such breakneck economic expansion sustainable? Not by these means: China’s credit inflation must eventually lead to a slew of bad loans that will bring lenders down. But this problem can be contained. These are state-owned banks that do as they are told and whose losses will mainly fall on the state. They are in effect bailed out in advance, not entirely unlike bankers with guaranteed bonuses.

The more important question is whether the speed of the economy itself, and not just the policies fuelling it, is dangerously excessive. Worries abound that China is overheating. But there are several reasons to think that China can safely grow at high rates without stepping on the brakes quite yet.

One is that price inflation is easing. As the government tightened credit conditions, the rate of increase of consumer prices slowed to just 2.4 per cent in the year to March, from 2.7 in February. If growth pushes inflation up, that will add to the case for a renminbi revaluation – already on the cards – which would bring it back down.

It is in housing that skeptics see the most red-hot conditions. House prices are indeed rising fast. But the real estate bubbles in China are largely local, in high-end segments of cities such as Shanghai. Overall urban housing prices have risen 11.7 per cent in the past year, a rate that would indeed look bubbly in a rich economy of sedate growth, but not in China, where it does not even keep up with the increase in the country’s income.

The challenge faced by the pilots of China’s economy is not, for now, its ballooning size. What they must worry about is its composition. Extraordinarily low consumption means poor Chinese have for a decade been subsidising western consumers’ credit cards. A large national savings rate has its counterpart in the trade surplus. A renminbi revaluation may change this – if Beijing really accepts the economy’s restructuring away from net exports towards domestic demand.

That requires bigger shifts than a revaluation. Households must be allowed to spend more – consumer credit growth suggests this is happening – and productive infrastructure tuned to domestic needs. Leaders must also accept the political effects of more empowered consumers. Marxists think politics merely reflects economic forces; China’s faux communists may still rather see it the other way around.

China is the Key to Unwinding Global Imbalances

In an interesting contrast to the Fan Gang op-ed, Financial Times contributor Arvind Subramanian (senior fellow at the Peterson Institute for International Economics and Center for Global Development) argues cooling measures such as capital flows management along with monetary and exchange rate policy, but coordinated on an international level. While citing an increasing trend in capital flows to emerging economies, he recognizes the potential for beggar-thy-neighbor policy strategies that incentivize nations to engage in a zero-sum game of laissez-faire economic policy. International coordination, he argues, can help mitigate this game-play and provide a more optimal outcome for all involved. His comments are included below in full.

Necessary adjustments in global imbalances are under way. China’s current account surplus is down from a peak of 11 per cent to about 6 per cent in 2009, while the US current account deficit is well down from its peak of 6 per cent. Estimates of future surpluses in China are being revised down. Yet the contours of the next imbalance are becoming clear and China’s exchange rate is central.

Essentially, the tidal force of capital flows to emerging economies faces only partially flexible currencies. The wave is being caused by a number of factors that have sharply increased returns to capital in emerging markets relative to those in advanced economies.

The biggest factor is the contrasting performance of emerging economies, especially in Asia, which are roaring back, while advanced economies, notably in Europe, are growing anaemically. As a result, the size of these flows is likely to surpass pre-crisis levels.

With these economies at different stages of cyclical recovery, monetary policy stances are also in contrast. With inflation still quiescent, monetary authorities in advanced economies are likely to withdraw policy support only gradually. In emerging economies authorities have started to tighten monetary policies to head off incipient inflationary pressures (China, India and Indonesia) or they are unwinding the earlier monetary accommodation as growth returns. Thus, substantial interest rate differentials in favour of emerging economies are becoming a reality, further pushing capital from advanced to emerging economies. Problems in Greece and consequential contagion in Europe might only aggravate capital flows to emerging economies.

How have emerging economies responded? Essentially through massive accumulation of foreign exchange reserves, the pace of which resembles the pre-crisis period. It is not that emerging economies have not let their currencies appreciate in response to flows; rather, upward currency flexibility has been limited. The irony is that this policy choice worsens the imbalance. The more inflexible exchange rates are, the greater the pull for capital flows because of the one-way bet that is created by policy.

How can this imbalance be resolved? To the extent that some flows are unavoidable and even desirable, emerging economies have to be ultra-vigilant in preventing overheating of goods and asset prices. Here there is reason for optimism. Especially in Asia the lessons from the late-1990s crisis and the recent one have been etched in the collective DNA. The 1990s crisis taught them what not to do, while the financial crisis affirmed the prudent choices made in the intervening years.

But emerging economies will want to moderate inflows of capital both for macroprudential reasons and to avoid becoming uncompetitive due to rising currency values. What should they do? The only two real options are capital controls and currency appreciation. But what is becoming clear is that the landscape is rife with beggar-thy-neighbour possibilities. For example, if some countries restrict capital, there is the risk that capital gets diverted to others, increasing pressure on them. And competitive non-appreciation – the revealed preference of many emerging economies given that their main trade competitor, China, has a fixed exchange rate – imposes large systemic costs, of global overheating and excess liquidity creation, as reserves pile up around the world.

The policy lesson is clear: the need for co-ordination among emerging economies on managing capital flows and exchange rates. Key to facilitating this is China’s exchange rate policy. It is welcome that China has signaled that the renminbi will be more flexible. But its policy of gradualism risks being overtaken by events. Given the scale of capital flows, a small move by China will probably only elicit a small move by other countries, especially in Asia. Given expectations about the magnitude of its eventual appreciation, the one-way bet will remain largely intact, with not much dampening effect on flows.

Rectifying the new imbalance will require an even more ambitious move by China. With that in place other emerging economies can then allow more flexibility in their currencies. De facto policy co-ordination is possible and China moving soon and substantially can help bring that about.

The Illusion of a Chinese Bubble

Recently on Project Syndicate we got to hear an opinion regarding speculations on the Chinese economy from a source not often seen in Western media – one from inside the Chinese economic apparatus. Fan Gang is Professor of Economics at Beijing University and the Chinese Academy of Social Sciences, Director of China’s National Economic Research Institute, Secretary-General of the China Reform Foundation, and a member of the Monetary Policy Committee of the People’s Bank of China. His comments on the “illusion” of an imminent trade bubble, given proper monetary policy and containment measures, are as follows:

BEIJING – On the eve of Chinese New Year, the People’s Bank of China (PBC) surprised the market by announcing – for the second consecutive time in a month – an increase in banks’ mandatory-reserve ratio by 50 basis points, bringing it to 16.5%. Shortly before that, China’s government acted to stop over-borrowing by local governments (through local state investment corporations), and to cool feverish regional housing markets by raising the down-payment ratio for second house buyers and the capital-adequacy ratio for developers.

This latest round of monetary tightening in China reflects the authorities’ growing concern over liquidity. In 2009, M2 money supply (a key indicator used to forecast inflation) increased by 27% year on year, and credit expanded by 34%. In January 2010, despite strict “administrative control” of financial credit lines (the PBC actually imposed credit ceilings on commercial banks), bank lending grew at an annual rate of 29%, on top of already strong expansion in the same period a year earlier. While inflation remains low, at 1.5%, it has been rising in recent months. Housing prices have also soared in most major cities.

These factors have inspired some China watchers to regard the country’s economy as a bubble, if not to predict a hard landing in 2010. But that judgment seems premature, at best.

To be sure, China may have a strong tendency to create bubbles, partly because people in a fast-growing economy become less risk-averse. Thirty years of stable growth without serious crises have made people less aware of the negative consequences of overheating and bubbles. Instead, they are so confident that they often blame the government for not allowing the economy to grow even faster.

There are also several special factors that may make China vulnerable to bubbles. China’s large state sector (which accounts for more than 30% of GDP) is usually careless about losses, owing to the soft budget constraints under which they operate. Local governments are equally careless, often failing to service their debts. In addition, various structural problems – including large and growing income disparities – are causing serious disequilibrium in the economy.

But a tendency toward a bubble need not become a reality. The good news is that Chinese policymakers are vigilant and prepared to bear down on incipient bubbles – sometimes with unpopular interventions such as the recent monetary moves.

Whatever one thinks of those measures, taking counter-cyclical policy action is almost always better than doing nothing when an economy is overheating. Whereas some policies may be criticized for being too “administrative” and failing to allow market forces to play a sufficient role, they may be the only effective way to deal with China’s “administrative entities.”

In any case, the new policies should reassure those who feared that China’s central government either would simply watch the bubble inflate or that it lacked a sufficiently independent macroeconomic policy to intervene. The consequences of burst bubbles in Japan in the 1980’s and in the United States last year are powerful reasons why China’s government has acted with such determination, while the legacy of a functioning centralized system may explain why it has proven capable of doing so decisively. After all, although modern market economics provides a sound framework for policymaking – as Chinese bureaucrats are eagerly learning – the idea of a planned economy emerged in the nineteenth century as a counter-orthodoxy to address market failures.

Some people would prefer China to move to a totally free market without regulation and management, but the recent crises have reminded everyone that free-market fundamentalism has its drawbacks, too. No one has proven able to eliminate bubbles in economies where markets are allowed to function. But if the fluctuations can be “ironed out,” as John Maynard Keynes put it, total economic efficiency can be improved.

Government investment, which represents the major part of China’s anti-crisis stimulus package, should help in this regard. Roughly 80% of the total is going to public infrastructure such as subways, railways, and urban projects, which to a great extent should be counted as long-term public goods. As such, they will not fuel a bubble by leading to immediate over-capacity in industry.

Moreover, roughly 40% of the increase in bank credit in 2009 accommodated the fiscal expansion, as projects were started prior to the budget allocations needed to finance them. Over-borrowing by local government did pose risks to the banking system and the economy as a whole, but, given China’s currently low public-debt/GDP ratio (just 24% even after the anti-crisis stimulus), non-performing loans are not a dangerous problem. Indeed, they may be easily absorbed as long as annual GDP growth remains at 8-9% and, most importantly, as long as local government borrowings are now contained.

Finally, the leverage of financial investments remains very low compared to other countries. Using bank credits to speculate in equity and housing markets is still mostly forbidden. There may be leaks and loopholes in these rules, but firewalls are in place – and are more stringently guarded than ever before.

So is a Chinese bubble still possible? Perhaps. But it has not appeared yet, and it may be adequately contained if it does.

The IMF in Europe: Institutional Evolution

“The IMF Does Europe” offers a glimpse at the changing role the IMF is playing in the world economy. For the last decade the IMF’s neoliberal doctrine and reportedly harsh austerity tactics have led developing nations in need of financial assistance to turn to non-traditional lending sources, such as China, for help. In the wake of the financial crisis and a major image overhaul, the IMF has made a resurgence onto the lending scene – but this time not simply as a lender of last resort to developing nations.

Rather, Europe has become “ground zero for the biggest expansion of IMF lending and influence in years.” And as the article indicates, the stakes are huge. Finding the right balance of firmness and leniency with regards to budget cuts, tax hikes, and a myriad of other financial adjustments will be difficult, particularly given the greater political power wielded by nations such as Greece, Spain, Italy and Ireland. These nations play a much larger role in the global economy than the export-oriented, largely agricultural economies of the developing world. As the IMF enters this new lending frontier, it must look beyond its past experience to develop a comprehensive program – one that ultimately ends in repayment.

IMF Institutional Ideology Inhibiting Critical Analysis of Markets

In his recent article, Hector Torres, former executive director of the IMF, discusses why the IMF failed to recognize the sub-prime mortgage crisis before it fully reared its ugly head. Contrary to many who believe that the IMF was “distracted or looking in the wrong places”, Torres proposes that it was the IMF’s ideological blinders that prevented the organization from identifying the oncoming calamity. The following is an illuminating illustration of the somewhat dogmatic nature of the IMF’s institutional culture:

“Let us now consider…whether the Fund suffered from a mindset that blinded it to the causes of what was happening. As early as August 2005, Raghuram Rajan, the IMF’s Economic Counselor (chief economist) at the time, was warning of weaknesses in the US financial markets. Rajan saw that something potentially dangerous was happening, warning that competition forces were pushing financial markets “to flirt continuously with the limits of illiquidity” and concealing risks from investors in order to outperform competitors.

Perhaps most revealingly, though, Rajan nonetheless optimistically argued that “[d]eregulation has removed artificial barriers preventing entry of new firms, and has encouraged competition between products, institutions, markets, and jurisdictions.” In other words, he clearly believed that regulation created “artificial barriers,” and that “competition between jurisdictions” – that is, between regulators – was to be welcomed.

Such beliefs come naturally to those committed to the view that markets perform better without regulation, and Rajan’s statement is a good illustration of the IMF’s creed at the time. And it was this boundless faith in markets’ self-regulatory capacity that appears to be at the root of the Fund’s failure to find what it was not looking for.”

With the resurgence of the industrial model and other philosophies that contradict the neoliberal Washington Consensus, there are some signs of emerging ideological diversity at the IMF. However, like any institutional culture, change is slow, must be actively nurtured, and is quick to rescind in the face of a crisis – or even a prominent distraction. Thus, it is critically important that the IMF question the underlying assumptions inherent in both its lending and supervisory frameworks; a critical inward analysis will yield significant insights, in turn allowing for a strategic evolution of the institution’s mission as developing nations reduce their dependence on the IMF as a source of emergency funding.

Return of Industrial Policy

In a recent article on Project Syndicate, Dani Rodrik makes the compelling claim that industrial policy is returning to the forefront of development discourse - in fact, he argues it never really left. Citing China, Chile, and most controversially, the U.S., Rodrik outlines three important policies regarding how industrial policy should be practiced:

“First, industrial policy is a state of mind rather than a list of specific policies. Its successful practitioners understand that it is more important to create a climate of collaboration between government and the private sector than to provide financial incentives. Through deliberation councils, supplier development forums, investment advisory councils, sectoral round-tables, or private-public venture funds, collaboration aims to elicit information about investment opportunities and bottlenecks. This requires a government that is “embedded” in the private sector, but not in bed with it.

Second, industrial policy needs to rely on both carrots and sticks. Given its risks and the gap between its social and private benefits, innovation requires rents – returns above what competitive markets provide. That is why all countries have a patent system. But open-ended incentives have their own costs: they can raise consumer prices and bottle up resources in unproductive activities. That is why patents expire. The same principle needs to apply to all government efforts to spawn new industries. Government incentives need to be temporary and based on performance.

Third, industrial policy’s practitioners need to bear in mind that it aims to serve society at large, not the bureaucrats who administer it or the businesses that receive the incentives. To guard against abuse and capture, industrial policy needs be carried out in a transparent and accountable manner, and its processes must be open to new entrants as well as incumbents.”

Rodrik’s points are well-formulated and seem to reflect the lessons learned over the past few decades – but even more importantly, they illustrate the complexities of forming an adequate national industrial policy: determining the appropriate level of government investment, incentives, and transparency without becoming bogged down in the process, slowing market evolution by generating creative and capital bottlenecks and harming the consumer. To say achieving a balance between these tensions is difficult would be an understatement. Nevertheless, in a fast-paced global economy where rapid innovation is increasingly important, Rodrik’s principles provide insight into the general strategies governments must employ to achieve a competitive advantage.

Washington Consensus Cartoon

This cartoon perfectly sums up the socio-political atmosphere surrounding the IMF and World Bank as of late, particularly given China's and the East Asian Tigers' immense success. However, both the relative consistency and quality of continuing success will likely dictate whether this role reversal is permanent or short-lived. (Cartoon originally from Carlos Serra's blog.)

China's "Beijing Consensus" Challenging the Washington Consensus

Since its formal elaboration in 1989, the Washington Consensus has been largely regarded as the premier model of growth for developing nations. However, this framework is increasingly coming under fire as China continues to experience large-scale economic growth, utilizing a methodology almost entirely counter to the Washington Consensus. China's success using this alternative model is garnering attention from other developing nations, who have typically been suspicious of the Washington Consensus since its inception. With China on the rise, unless a catastrophic economic event occurs to dampen the success of this new "Beijing Consensus", it is likely the neoliberal Washington Consensus is on its way out.

Washington Consensus

The Washington Consensus, as delineated by John Williamson, has ten core tenets:

1) Fiscal Discipline
2) Restructuring Public/Social Expenditure Priorities
3) Tax Reform
4) Liberalizing Interest Rates
5) Competitive Exchange Rates
6) Trade Liberalization
7) Liberalization of Inward Foreign Direct Investment
8) Privatization
9) Deregulation
10) Property Rights

Under the model, successful implementation of these principles should result in economic growth in general, and per capita GDP expansion particularly. Regardless of espoused results many have rejected this model, including a majority of the developing world where it is widely felt that the Washington Consensus was simply a new mechanism for the developed core to take advantage of the developing periphery. Indeed, Williamson himself has acknowledged that the Washington Consensus "has been interpreted to mean bashing the state, a new imperialism, the creation of a laissez-faire global economy, [and] that the only thing that matters is the growth of GDP." Argentina’s case is often cited as a quintessential example illustrating the failures of this model.

Beijing Consensus

China, as opposed to the rigid, structural framework of the Washington Consensus, has adopted a much more dynamic, fluid, and tailored policy. It’s driven by three primary themes, which are:

1) Innovation
2) Pursuit of Dynamic Goals/Rejection of Per Capita GDP

3) Self-Determination

Innovation has long been emphasized by China, and it a critical component of the Beijing model. According to Joshua Ramo, “In order to outpace the ‘friction losses of reform’, government must actively innovate in order to address the challenges introduced by the changing economic and social environment. The Chinese government often utilizes public opinion polls and survey to determine the issues most important to the public and address them first.

China’s rejection of per capita GDP as a measure of economic growth is part statistical evolution, part rejection of Western policy frameworks. Instead, the Beijing Consensus places emphasis on measures such as quality of life and individual equity, which helps provide a more comprehensive picture of living conditions and illuminates trends that have a disparate impact on certain groups. By stressing these new metrics, China has also shown the necessity and feasibility of pursuing multiple goals simultaneously. The following quote from Yusuf and Nabeshima illustrates this:

“[China’s development strategy], according to Premier Wen Jiabao, involves putting people first and promoting reform and innovation in accordance with the ‘five-balances’: balancing urban and rural development, balancing development among regions, balancing economic and social development, balancing development between man and nature, and balancing domestic development with opening wider to the outside world.”

Finally, in concert with much of China’s foreign policy, the Beijing Consensus stresses the need for developing nations to resist pressures from developed nations, particularly the U.S. To set an example of this, China claims it does not impose its own priorities or agenda on developing partner nations. This may be debatable, but the fact that China espouses this ideology at all is a stark contrast to the Washington Consensus’ rigid policy framework.

Implications

The schism between the Western “regulatory state” and the Eastern “development state” has become pronounced and will only continue to grow. The Western version has advocated refraining from interfering in the marketplace, except to insure certain limited goals, whereas China has intervened actively in the economy in order to guide and support large-scale, substantive goals. However, it is not the theory itself, but rather China’s success which could ultimately cause the demise of the Washington Consensus. Utilizing this model, China has cut the number of its citizens living in absolute poverty by 235 million. The World Bank confirms, “China has contributed to 67% of the total reduction of global poverty during the last 25 years” (People’s Daily, 2008). With these levels of success, it may only be a matter of time before the Beijing Consensus finds a new home in Washington.

References:

--. 2008. “235 million people lifted from absolute poverty.” People’s Daily (English).

Ramo, Joshua Cooper. 2004. “The Beijing Consensus.” The Foreign Policy Centre.

Williamson, John. 2004. “A short history of the Washington consensus.” Proceedings from 2004: From the Washington Consensus towards a new Global Governance. Barcelona.

Yusuf, Shahid and Kaoru Nabeshima. 2006. China’s Development Priorities. The World Bank.