Tag Archives: Microfinance

The Latin America “Middle Class” Cliche: Why It Doesn’t Work And How To Fix It

If we wanted to go totally meta with this, we could talk about how people’s shrinking attention spans preclude meaningful conversation and understanding about subjects too complex to be crunched into 140 characters or even 1,200 words.

Seriously, how many slice of life stories do we really need to read about Manuel the carpenter/mechanic/cab driver in Toluca/Cali/San Jose who just paid for a new dishwasher in monthly installments with remittances sent from his 1/3/7 relatives in the US ?

Enter, unexpectedly, the World Economic Forum on Latin America, which just wrapped in Peru the week before last. I never expected a WEF gathering to nail it, but nail it they did in a panel entitled, “Unleashing the Power of the Middle Class“, whose commentary I promise you is far more compelling than the session title.

I don’t blame anyone for not having an hour to sit through this (that’s what I’m here for), so what we have here instead are two of the smartest things I’ve heard anyone say about the so-called “middle class” of Latin America since I don’t know when:

At about 16:00, Marcelo Cortes Neri, Brazil’s Minister of Strategic Affairs:

Just one small point with respect to this in terms of definition. I think when we talk about middle class, we talk very much about US or European definitions, where you have two cars, two dogs, two kids and I don’t think this is a good definition in my opinion.

I think we are having two kids which is important, gives you sustainability, but I think if we look at the US and Europe, we will see ourselves as poor–they are the richest in the world–so I am very much in line with the Minister’s idea, we have to look within our communities and countries, and I think if we do that, the world here…because Latin America actually in terms of its income and its very high inequality, but this is a very good picture of the world, so I don’t think we should import definitions from developed countries, otherwise we are not going to see ourselves moving; we are going from someone whose income changed from $1,000 to $2,000, and you look up, you say well nothing changed in this guy’s life, but there’s a revolution going on.

One last point: I think it would be very tough to respond to the aspirations of the Latin American middle class because we have very high aspirations. Latin Americans are very positive toward their future, it’s more…if you are controlling for income, nobody is more optimistic to the future than Latin Americans. So this is tough.

I’ve been saying this in some way or another for years now, but Minister Neri actually put it in far more eloquent language.

The second comment, which comes at 30:00, is Augusto de la Torre (no relation to yours truly) Chief Economist, Latin America and the Caribbean, World Bank. And disregarding the aforementioned inappropriateness of the phrase “middle class”, what he has to say could not be more true:

I’d like to add a dimension which we highlight in our report. We are excited about the growth of the middle class because people have a better life. But we are also excited because we believe deep down that the bigger middle class will make for better societies. So there is this correct perception that the middle class is associated with citizenry. That middle class people are more educated, they have better jobs, they have a better understanding of what the common good is, and they can push for better institutions, they can reduce the levels of corruption, monitor the government so they can produce better education, etc.

So we did some exercises on this and we found it is not so simple. When we look at the world as a whole and you do the statistics, you do find very good positive associations. Countries that have larger middle classes have lower corruption, better institutions, better government spending, quality, freer markets, better property rights. So these associations are what inspire us. But we have also found, and this is the troublesome part, that the Latin American middle class does not seem to be opting into a better social contract. In fact, what we found was evidence that the middle class in Latin America has a tendency to opt out of the social contract.

Let me give you a couple examples to explain what I mean. The moment a Latin American household becomes a middle class household, the first thing they do is take their kids out of public schools and put them in private schools. They no longer are concerned about the quality of public education as a result. You go to the Dominican Republic, the moment you are a middle class family, you buy your own electricity generator, because you don’t want to trust public electricity services. So once you have your generator, you don’t care about the quality of the public good of energy.

Or when you become a middle class in many Latin American cities, you try to buy a house in gated communities, they have walls, they have private security, because you’d rather not rely on the public police. So you could end up in a bad equilibrium.

So rather than what you would expect, which is a middle class which contributes to better institutions, more public goods, more cohesive society, better citizens, you may end up with a middle class that opts out and finds private ways of solving their own problems. And their interests may diverge from the public good.

Now let’s close this by going back  to the meta. It seems to me that so many people are so desperate for certainty that they resort to the flimsiest of evidence and the sloppiest of explanations to lean on for decision making. In short, sounding like you know what you’re talking about has in some ways become more significant than actually knowing what you’re talking about. And the pithier you sound, the more you’ll be quoted,  and the more you’ll be recognized, which just goes around and around until you wind up with some signalling phrase like “Latin America’s growing middle class” which really, when you get right down to it,  has absolutely zero meaning.

Basic Strategy For Hyping An Investment Trend

2013.03.11.PlanetHypeI’ve seen this happen so many times, I could teach a class on it:

  1. Take a small data sample of something that confirms the view you’re determined to promote;
  2. Regardless of how rigorous the methodology or how representative the sample size, declare that this is indicative of a broader trend–forest for the trees or some such thing;
  3. Willfully ignore any aspects of this declaration that remotely contradict your view;
  4. Deny/insult/discredit/lash out at anyone who tries to take an even-handed view on it;
  5. Begrudgingly concede that nothing is perfect but that a positive attitude is what counts;
  6. Neglect to make clear the very pertinent fact that you have a vested interest–financially, politically, reputationally–in a positive outcome which therefore inhibits your own objectivity;
  7. If your lawyers insist, loosely outline the caveats to your opinion and bury them somewhere where they are least likely to be noticed (“past performance is not indicative of future results” is the boilerplate here);
  8. Debunk the caveats by paraphrasing points 1 and 2 and emphasize the probability your forecast will prevail;
  9. Lather;
  10. Rinse;
  11. Repeat.

Now, let’s consider a brief list of where we’ve seen this template applied in the recent past:

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Latin America as Microfinance’s beacon

While increasing attention is being given to the less than scrupulous elements of the microfinance industry, I thought it curious that the Economist Intelligence Unit’s annual “Global microscope on the microfinance business environment”, released last month, seems to go a bit in the opposite direction. Not that it ignores the ethical challenges facing microfinance—indeed, the very point is made rather clear in the categories the EIU uses to describe the business environment: supporting institutional framework, stability and regulatory framework. I realize that these sorts of qualitative measures do have an effect on profitability, but investors looking for some discreet idea of the sorts of returns to expect from the 55 countries covered in this index will be left wanting. Perhaps it’s still too early to draw any conclusions on that front, but if the industry ever wants a critical mass of foreign capital, it still has to figure out how to be more quantitative in the way it expresses itself.

In any event, here’s a snapshot of the latest ranking:

Latin America clearly dominates the top of this index. From the report’s key findings:
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Does Africa need food fast or fast food?

I know Bloomberg TV doesn’t care what I think about its coverage, but its increasing ooh-aah-gee-whiz approach to frontier markets really drags it ever more lowbrow and any honest broadcast journalist by definition should have a hard time denying this. But despite the deluge of tired platitudes (emerging middle class, Africa’s $1.8 trillion economy, small business empowerment), it does manage to pull out one telling quote from American entrepreneur Alden Edmonds in his quest to bring the Subway franchise to East Africa at 1:30 into this segment:

“There’s an informalness to the way you do business there, where someone might expect a gratuity. As an expat, you’re sort of marked as someone who might be willing to do give a little extra to help get the transaction done.”

It’s a brief segment that no doubt is going to be lost among the far more influential breaking news in frontier markets today, but this doesn’t make it any less important. Continue reading

Theory vs. Practice: Confessions of a Microfinance Heretic

“Journalism,” George Orwell is supposed to have said, “is printing what someone else does not want printed: everything else is public relations.”

I don’t know if Hugh Sinclair realizes this, but despite lacking any formal journalism training, he has indeed committed an act of journalism in his recently published book, “Confessions of a Microfinance Heretic: How Microlending Lost Its Way and Betrayed the Poor.”

The book’s title is indicative of what’s inside and Mr. Sinclair does a nice job backing up his claims with well researched and annotated sources where the source is not his own decade of experience in the field. Among the basic findings:

  • Microborrowers at some of the industry’s poster child institutions pay interest rates considered usurious, extortionate and predatory in any other context, but somehow the microfinance canon has convinced a critical mass of people that this is the road to solving poverty;
  • Due diligence by American and European microfinance investment funds into microfinance lenders is all too often a joke, and not a very funny one;
  • In certain cases, financiers, some of whom represent the largest banks in the world, are aware of what are arguably unsustainable and unethical practices at microfinance institutions but turn a blind eye to them in the pursuit of greater yield.

And much, much more. Here’s a short list of what else this book is: jarring, jaw-dropping, infuriating, inflammatory, and yes, heretical. At the same time: enlightening, engaging, inspiring, illuminating.

And now here’s an even shorter list of what this book is not: bullshit.
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Microfinance finally learns to speak finance

Gotta be honest, I opened CGAP’s latest brief, “Microfinance Investment in Sub-Saharan Africa: Turning Opportunities into Reality” and the first two pages were so depressing I seriously almost stabbed my eye out with a rusty butter knife I keep handy for such occasions.

But then I got to the third page and was encouraged by what I found. Not because microfinance in Africa is booming great guns and everyone has lifted themselves out of poverty forever—it isn’t and they haven’t—but because there’s an unmistakable shift in the way the non-profit side of the industry, at least as represented by CGAP, is talking about efforts to achieve sustainability. Maybe this is a postpartum result of several years of ex-JP Morgan-now-OPIC-chief Elizabeth Littlefield in charge (if you don’t know her, Google her, she’s kind of a badass), but I’ve been watching the industry’s positioning on this for about a decade now and for the first time I…well I refrained from stabbing anyone with a rusty butter knife. That’s progress, right?
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Microfinance lending survives, diversifies, despite Eurozone crisis

CGAP’s take on development finance is generally a bit too abstract for me, but its recent report, “How Have Market Challenges Affected Microfinance Investment Funds?” has some interesting nuggets. To me, the main takeaways are these:

Total assets of the 10 largest Microfinance Investment Vehicles (MIVs) grew by 7.2 percent in 2011, above the 4.1 percent growth rate in 2010, but still below precrisis levels (e.g., 31 percent in 2008 and 23 percent in 2009)…Although support from investors remained relatively strong, some fund managers interviewed noted that raising private investor capital has become more challenging, mostly due to the negative developments and publicity in several microfinance markets, as well as economic weakness in several European economies.

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Keeping it real with microfinance

David Roodman of the Center for Global Development continues his no-punches-pulled outing of the microfinance phenomenon in this weekend’s Washington Post. I’ve followed his opinions off and on about this over the years and have yet to disagree with anything he’s had to say.

This time, he rightly asks the question of whether households with higher borrowing cause higher earnings or vice versa and he relies on more recent evidence coming from India and the Philippines, among others:
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Some advice for Goldman Sachs, Department of Public Relations


In April 2010, Matt Taibbi, Rolling Stone writer, referred to the investment bank, G—— S— as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

A full two years prior, the investment bank G—— S—, launched a five-year $100 million campaign to educate and support women who run small and medium-sized enterprises in emerging economies by providing them with management and business training.

Who is this mystery investment bank? Give up?
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