Phonecards and Peanuts: Looking at Micro-finance through the Macro Lens
15 November 2009 at 23:44 ilmarisoininen 14 comments
Ilmari Soininen
KF9 UIMCEC Dakar, Senegal
Topping up one’s phone credit is never a problem in Dakar – on every street corner you will find one, or usually three or four young men hawking the same exact Orange Telecom cards. They offer the exact same cards, in the exact same spot, at the exact same time. Peanut vendors are equally ubiquitous, often stationed only a feet away from each other, selling the same peanuts, in the same 50 Franc increments.
These vendors often rarely have many other avenues for generating income. Many come from the countryside, where subsistence farming is usually the one and only option. They prefer the hustle and bustle of the city. They prefer the 500, 1000 or even 2000 CFCA (between US$ 1-4) they can make a day. Who can blame them.
But when you add up all of the thousands of phonecard, peanut (cigarette, tissue, fruit …) vendors, you begin to see why this country, and indeed many of its neighbors, are still so poor. With so many young, able bodied workers devoting long hours every single day to hawking the same commodity items, it seems like a 0, or at best 0.0001, sum game. It is hard to argue that each additional hawker is reacting to increasing demand. The same amount of phonecards would be sold with one guy per street corner instead of four.
Further up the food chain, the story seems the same. Looking through the stack of loans at a local branch, every single loan application the loan officer read-off was for a small-scale merchant. Many were selling the same exact Malian fabrics, Guinean fruit or Chinese mobile phone accessories as the boutique one hundred feet away.
These merchants often do see an increased income thanks to micro-loans. Many go on to invest these gains in the health and education of their children, or in building a home or diversifying their business. All very positive for both social and economic development. And there is the intrinsic value of participating in the formal financial sector – supporting the integral institutions of a functioning economy. But at the end of the day, the amount of added value to the economy from simply selling an (imported) good hits a peak quite quickly.
We are often caught up on the success of micro-lending on the individual micro level, but how does it add up in the aggregate? Is financing vendors of commodity items adding to the well being of the community and nation as a whole? Is the pie actually growing or is it just being sliced up into more and more pieces? Does micro-finance really have the power to propel an entire country out of poverty?
I invite your ideas and comments – these are tough questions, and ones to which I’m sure Kiva fellows and lenders can offer good insight.
Why not make your next Kiva loan to UIMCEC? We currently have two loans from the Dakar area. Check ‘em out UIMCEC borrowers
Entry filed under: Africa, blogsherpa, KF9 (Kiva Fellows 9th Class), Senegal, UIMCEC, a partner of Christian Children's Fund. Tags: .
1. Remittances, Part 1: Money from Siberia « Kiva Stories from the Field | 24 November 2009 at 06:30
[...] week, Ilmari Soininen asked the question whether microfinance is cutting up the proverbial pie into more pieces or whether it’s making a [...]
2. coambse | 24 November 2009 at 01:25
Wow thanks for putting into words what I have been thinking and unable to put into words.
I hate to use this saying but microfinance is not the silver bullet, but more likely only another piece of the poverty alleviation pie.
It’s these situations that make me want to study developed countries histories to see how they over came the same problems of undifferentiated commodities being sold in the market. Education is an easy card to pull but there seems like there are many other factors like government involvement, legal systems, property rights, and well the list could go on.
I hate to say it but I think that it is going to take a few of these people to get really good at selling the commodities to make it no longer profitable for others to stay in business, which in economic terms should cause them to retool and enter new markets. I think a greater development of specialization and service industries could significantly improve the business environment for everyone. The challenge is to show a high enough payoff for taking the risk of striking out and doing something different.
Which makes me think that if some of these entrepreneurs could create a enough of a safety blanket to strike out in a new direction then they would make the job. But that would take a cultural shift towards becoming savers.
So I have rambled to long but I appreciate you putting into words this big challenge.
Ed
3. Dave | 21 November 2009 at 04:07
I’ve just started working for BRAC microfinance in Sierra Leone, and you’ve just descibed exactly my source of scepticism about the impact of our programme in the urban areas here.
But I worry not only about the macro consequences being insignificant, which if this is the case then the case for microfinance still seems strong because raising the income levels of individuals at little cost is clearly worthwhile.
I worry that increasing the wealth and stock size of petty traders may also have negative consequences. As the blog acknowledges, the demand for such goods seems fixed (assuming the price is). So, it seems that increasing the size of one trader is unlikely to increase the amount sold by the market. One consequence may be that other traders sell less and get poorer.
It is true that microfinance for petty traders seems insignificant in stimulating any notable economic growth, after all nothing new is being created or added to the economy. But if it adds to the income of the poorest, then this isn’t a bad thing. But if it makes some of the poor richer, and some the other poor poorer, it might be a bad thing. There are some very important and interesting issues here. Does anyone know more about them or about any research into the macro impact of urban microfinance?
4. Ilmari | 25 November 2009 at 04:51
Hey Dave
Thanks for your perspective. I would imagine that the diversity of goods on sale is even less diverse over there than here in Senegal.
There isn’t a ton of research, but here are a couple papers I found the most compelling (and non-biased). As well, I would check out Karl’s link above.
From Esther Duflo, one of the top development economists:
http://www.povertyactionlab.org/papers/101_Duflo_Microfinance_Miracle.pdf
From two Vanderbilt economists:
http://ideas.repec.org/p/van/wpaper/0519.html
An interesting (non-academic) article from the Boston Globe:
http://www.boston.com/bostonglobe/ideas/articles/2009/09/20/small_change_does_microlending_actually_fight_poverty/?page=2
The Economist has several insightful articles on micro-finance. Just go to economist.com and search micro-finance (you will have to register to read the articles)
Hope this sheds a bit of light on your question
5. Dave | 25 November 2009 at 06:36
Thanks for the help Ilmari, the papers look really useful. I’ve got some reading to do!
6. Howard Zugman | 19 November 2009 at 02:44
Very good blog,Llmari, and it brings up an interesting point. Microfinancing will probably not solve ALL the finacial problems in developing countries. However, even slicing up the pie in smaller and smaller slices by itself serves some good up to a point. The trouble is that each new slice brings a diminished return compared to the last. However, I feel that inevitably at least some of the lendees will realize this and be inspired to move into new areas of commerce. If I am right about this, then there will be more and more pies to be sliced.
Let’s all keep our fingers crossed.
7. karlbaumgarten | 18 November 2009 at 09:13
Ilmari, interesting post and great photo. This article Dosas by the dozen http://ifmr.ac.in/cmf/publications/wp/2009/27_spears_dosasbydozen.pdf is an interesting theory about why the poor often have such similiar businesses. Basically argues that experimenting with new businesses is costly which prevents them from doing something different.
8. Maria | 17 November 2009 at 15:02
Nice Blog! really interesting!
9. Ilmari | 17 November 2009 at 14:04
Thanks for the constructive feedback. The link Greg posted is really useful- I’m going to dig into the research and maybe post a reply once I wrap my head around it some more.
Micro-finance and poverty alleviation:
http://www.kivafriends.org/index.php/topic,4120.msg71086.html
10. robpacker | 17 November 2009 at 02:29
Great post, Ilmari. I feel that things in Kyrgyzstan are similar with 80% of the borrowers I see buying milk cows so they can sell the milk. Like you, I still wonder how much milk people in this country can possibly drink.
No-one said it was going to be easy and the path that microfinance must take is long and difficult. The irony at the end of the tunnel is that I hope that one day microfinance won’t be necessary: that’s the day when there is no more poverty to relieve.
11. Jan & John, KivaFriends | 16 November 2009 at 11:31
great topic Ilmari. I think a lot of borrowers are living hand to mouth in survival mode… but if they can just support their families and their children long enough to improve the education level, as Jeremy posted, there may be hope for the future. jan
12. Thomas | 16 November 2009 at 11:27
Great topic Ilmari.
I’m facing exactly the same situation in the DR (I’d bet the “Orange guys” wear exactly the same suit here) , and tried to bring it up in my last blog entry.
Clearly, microfinance alone is an incomplete tool to lift up the level of development of an area or a country.
It doesn’t directly help solving issues when the area suffers from very poor basic services such as electricity, running water, roads, education or health.
This would rather need massive inversions in national companies which microcredit doesn’t provide.
However, my feeling is that
“microcredit alone cannot address all of the economic development needs of an area. However, thanks to the improvement in the standard of living for the poorest classes and those that live in the most isolated areas ( and who therefore suffer most from the lack of water and electricity), these issues will soon become the new priority.”
13. Greg | 16 November 2009 at 08:27
Thanks for posting a great topic. I copied this to Kiva Friends for discussion. http://www.kivafriends.org/index.php/topic,4612.msg71680.html#msg71680
Greg
14. Jeremy Lapedis | 16 November 2009 at 06:47
Ilmari,
This is an interesting question you have proposed. I often find myself caught up in the personal aspect of microfinance in which you are helping one single person, which is no small feat. But I can understand that seeing people all selling the same phone cards in Senegal, or the same artesenal blankets as I see in Guatemala, can lead you to question the bigger picture of microfinance. And if microfinance were the only thing in action here, I’d be at a loss, but, as you said, these people are investing in health care and education for their children. These investments are for the future, not the present. It’s important to remember that microfinance is not the answer to poverty, just an effective tool, when combined with other methods, to working towards alleviation of poverty. So while you may still see 4 people selling phone cards on the corner now, a generation from now, there may be only one. It’s slow, but for now that’s what we got. Keep up the good thinking.