April 13, 2009
The Wonderful Magic of War Zone Microfinance - Iraq
Following my short note in Lounsbury 'next door' a longer comment on the' FT arty "Small US loans are catalyst for Iraqi business"
First, on the item that most irritated on reading
“I have increased my earnings and improved my family’s quality of life,” says Hamza Abid Ali, a grape-grower from Balad who has quintupled his income since taking out a $2,400 (€2,200, £2,000) loan from the Al-Baydaa Centre, a US-backed microcredit scheme. “I was earning only 500,000 dinars [$432, €322, £292] from each donam [unit of land] on my vineyard,” says Mr Ali, a 33-year-old father of three.“But with my loan, I bought a water pump and some netting to go over the top of the grapes, and now I am making 4m dinars per donam.”Emphasis added: Having read my share of Donor AgitProp, this sort of repetitiously canned donor-lang. gets under my skin. It is positively formulaic.
In particular as the one-off examples say fuck-all about eventual longer financing stability or economic impact (although of course the examples are intended for audiences that would not understand the same).
In any event, micro-credit is so bloody fashionable that it is hard to sort out real results from fashionable spin. I do confess, however, there is some impact, although I personally tend to find it to be more along the lines of "poverty maintenance" rather than the sort of investment and financing that can create long-term and real sustained wealth growth. Not that poverty maintenance does not have its place, in particular in corrupt systems where the longer run growth investment prospects are .... constrained shall we say? There poverty maintenance may be simply the best choice available.
Regardless, the background
Mr Ali is one of the small business owners in Balad, 80km north of Baghdad, who have borrowed relatively tiny amounts of money from the Al-Baydaa Centre.
In the past two years the centre has given out 700 loans to everyone from hairdressers and carpenters to fruit farmers and cell phone shop owners, from $1m-plus in start-up capital from different arms of the US government.
Although Iraq has huge oil reserves and large public corporations, small businesses – particularly “mom and pop” stores – comprise 90 per cent of all businesses in the country, US officials say.
90% of businesses sounds terribly impressive, but then small businesses everywhere are rather like that (overwhelming in sheer numbers, but trivial in employment given tiny per firm employment), but that does not make them necessarily terribly good long-term employment drivers - in particular without a healthy corporate sector driving the economy.
Fuzzy thinking however is typical:
Encouraging them is crucial for economic development, says David Shearer, the United Nations’ resident co-ordinator for Iraq.Emphasis added.
“Iraq needs to develop the private sector to generate jobs,” Mr Shearer told the Financial Times.
“Our calculation is that 450,000 young people join the workforce every year but the chances of them finding employment are not high, so if this is not dealt with it will create instability.”
The business sector has been held back by an absence of strategic planning, low productivity and efficiency, and rampant corruption.
And one never, ever finds strategic planning or high productivity in Mum & Pop shops (well never perhaps exagerates). Microfinance is not a solution to a competitive business sector, nor absence of strategic planning, productivity issues, etc.
It's warehousing poverty under better conditions.
On that front:
“There is a lot of money to be made in Iraq but there is not a lot of entrepreneurial spirit,” says Jesse Levinson, of the US’s provincial reconstruction team in Salahaddin, which includes Balad.Emphasis added.
The Al-Baydaa Centre in Balad is championed by US authorities as a harbinger of the economic development that can be brought about across the country.
The $2,400 loans are to be repaid, with 12 per cent interest, over one year. The pair claim to have a 100 per cent repayment rate – although sometimes payments have to be rescheduled – and say they have had to take only one errant borrower to court.
First, of course entrepreneurial culture is a rarer creature than USAID Adminstrators or Americans like to believe. Rarer still in warzones where a degree of risk aversion among people wihtout much of an asset cushion is not at all irrational.
The other item that caught my eye is the interest rate. 12% under such circumstances is really grant capital in the end.
The Al-Baydaa Centre in Balad appears to be operating smoothly but not every scheme is so successful.Hope springs eternal.
The US’s Al-Mosaned fund in Tikrit has encountered a string of problems – mainly involving a non-existent paper trail and disappearing funds – that necessitated new managers being installed.
Furthermore, analysts say that the microfinance institutions rely heavily on international assistance and would probably not survive without the US’s financial and military backing.
But the US hopes such schemes will contribute to wider change in Iraq.
“We have been able to make a lot of progress on political freedom,” says Mr Levinson of the provincial reconstruction team, “and I think we can do the same thing in the economy.”
I recall similar hopes and programs from seven years ago. Bloody hell, that long already. Regardless, one item to retain re the failures, it is very, very hard to scale such human skill intensive projects. Which is a reason why this kind of anectdote to model is not easily generalisable - and impossible to do so quickly.
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There poverty maintenance may be simply the best choice available
Better options, by order of preference:
1 - Invest in mid to high-end skills (3-7 payback, no matter how corrupt and messy)
2 - Cultural engineering (more intangible, but individualism, internal locus of control, hard work/science ethics, rationalism, achievement orientation, tend to be correlated with development - leftist crowds and touchy feely relativist objections notwithstanding).
This isn't even really microcredit. These sound more like run-of-the-mill small business loans. Traditional microcredit loans are usually more like $24 than $2400.
I've never really thought of them as "poverty maintenance" before but that's a definite point. One of the things I do like about microcredit schemes, however, is that the good ones are actually business propositions rather than aid schemes. Of course, the more fashionable the idea becomes, the more marginal the implementation.
The "ads" are pretty funny, though. They sound exactly like those ads for work-at-home schemes, "I make $8000 a month watching porn on my computer! You can too!"
Posted by: Anonymous at April 13, 2009 08:53 PM