New options for aid more effective than macro-aid and encourage entrepreneurs

By Emily Moody

Apr. 27, 2009

In the current financial crisis, third world countries are in even more danger of sinking further into poverty, as inflation increases and prices go up. This is on top of problems with the current system of aid, in which wealthy countries donating large amounts of money, food or supplies. This practice is not only ineffective, but contributes to a cycle of poverty and government instability. As a March 27 article in the Ethiopian Review notes, “Evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone… and more unattractive to higher-quality investment.”
And beyond its economic harms, foreign aid has also decreased regional stability. “It's increased the risk of civil conflict and unrest,” the article continues. “Aid is an unmitigated political, economic and humanitarian disaster.”
What can a person do to help? Instead of individual donations, which are of questionable success, we should embrace the system of microfinance, or small scale banking and loans for the poor. Extending small loans to people in developing countries, or microcredit, aims to promote entrepreneurship and improve quality of life.
Consider contributing to individual entrepreneurs in the third world through organizations such as Kiva (www.kiva.org) that feature profiles of impoverished entrepreneurs from around the world, including photos and business plans. Donors can choose to lend money to the entrepreneur of their choice in increments of $25. For example, Hin Phal, a weaver in Cambodia who makes $2 a day, asked for donors to loan her a total of $1,200 to start a construction business with her husband.
Kiva sends the money to a Microfinance Institution (MFI) in the entrepreneur’s country of origin, which distributes the money to the entrepreneur. The entrepreneurs use the money to implement their business plans and over time pay back the loan. The MFI then returns the money to Kiva, which returns the money to the lender. Kiva has a high success rate: according to its Web Site, only 2.1 percent of its loans are not paid back. Traditional banks do not cater to the poor, who have no credit and no collateral to take out loans. MFIs, which may be non-profit organizations or more traditional banks, extend the usual financial services but on a smaller scale (hence “micro” finance).
Rather than sticking a band-aid on the issue of poverty, microcredit promotes a long term solution by increasing assets and improving health and education levels. According to the Consultation Group to Assist the Poor, the World Bank’s global microfinance center, loans lead to increased income, which results in better nutrition and living conditions. When they are more secure in their incomes, families can send their children to school for longer periods of time. Over time families can even work their way out of poverty.
The Grameen Bank in Bangladesh, a pioneer in microfinance and winner of the 2006 Nobel Peace Prize, is a prime example of this. According to CGAP, after eight years of borrowing from the bank, 57.5 percent of households were “no longer poor” compared to 18 percent of households that had not borrowed. Education among children whose households had borrowed was also higher, as 81 percent of boys received schooling compared to 54 percent in non-borrowing households.
Instead of furthering the problem of world hunger by donating food and allowing yet another generation of children to live in extreme poverty, we should help third world entrepreneurs in the long term by supporting microcredit and organizations like Kiva.