Could we see a microfinance bubble?

Vikas Bajaj’s recent article in the New York Times entitled Sun Co-Founder Uses Capitalism to Help Poor details the story of Sun Microsystems co-founder Vinod Khosla and his venture into microfinance. His recent investment in SKS Microfinance netted him $117 million after the company issued an initial public offering (IPO). The narrative of the article is that there is insufficient capital available to truly combat poverty and that Khosla is trying to channel his profits into productive outlets that will reduce poverty in a significant way. The dissent within the article is limited to the basic “you can’t put profits over people” mindset while Khosla sees N.G.O.’s as ultimately ineffective, presumably because of the lack of funding.

Aside from addressing the potential marginalization of microfinance’s noble social goals, there is a completely separate issue of the ramifications of such a flood of fund into social ventures. Money can only be a valuable resource if it can be put to good use through strong institutions and managers. Growing the budget of an organization does not necessarily result in an increase in it’s effectiveness. Even so, Kosla should be commended for his efforts to fund a wide range of social ventures such as milk collection and chilling plants which will direct cash to more than one place.

Without sufficiently strong institutions, the potential for a microfinance bubble is very real since the effectiveness microfinance depends on fiscal sustainability. The article almost gets to the point here:

Moreover, as the fallout from the global financial crisis has made clear, the profit-maximizing tendencies of businesses can hurt society, said Phil Buchanan, president for the Center for Effective Philanthropy, a research organization based in Cambridge, Mass.

A common conception about the financial crisis is that it was caused by unbridled self-interest. That is a partial answer, but the real driving force behind the crisis was that self-interest combined with an inexhaustible supply of credit in an unregulated market. Microfinance is a poverty-fighting tool which utilizes credit itself. With that in mind, could we see a Minsky bubble in microfinance as large sums of money flow into these ventures? A lack of skilled managers doing their due diligence would be another ingredient in the recipe for such an outcome. Combined with the recent IPO clouding the incentive structure of the organization, there is a risk for creating financial instability through a mechanism that was meant to bring stability to the developing world.

The fact that micro-loans are not collateralized will keep any crisis from spreading to the wider economy in the way that the housing boom of the mid-2000’s did. Nevertheless, a boom and bust of any proportion within the microfinance system would put it’s long-term sustainability in question. The real way to provide stability would be to strengthen the organizations and foster a long-term growth plan. However, the article makes clear that Khosla values the desires of wealthy donors over experienced N.G.O.’s. It will be interesting to see the ultimate impact of SKS Microfinance on the greater system and if we see some of the problems associated with for-profit lending start to creep into this form of financial services. In the meantime, the raised capital should be invested in the organization rather than used to extend credit beyond it’s scope and capability.

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The Impact of Globalization on Indigenous Peoples in Mexico and Bolivia

The following is a paper written for the author’s PLS 315 – International Political Economy class.

Abstract
Globalization has presented itself in many different forms, affecting nearly all people of the planet. While much attention is paid to the extreme positive and negative impacts, the process has created both winners and losers. The same mixed result can be seen amongst the indigenous peoples of Mexico and Bolivia. These two significant indigenous populations have faced sizable challenges due to the integrating economic, political and cultural landscape. Nevertheless, the forces behind globalization have not only provided a means for resistance, but also a chance to confront the long-standing marginalized status of indigenous peoples. Despite these efforts, the effectiveness of political and social leaders as well as the policy of developed nations and multilateral institutions will determine the lasting impact of globalization.

View the PDF of the entire paper

G-20 Protests – Just Say No to Capitalism

As world leaders, activists and the media descend on London for the G-20 summit, there seems to be a clear message from all parties involved:  something needs to be done.  The real question is not whether action is necessary, but rather what is the problem what is it’s cause.  Politicians have turned their attention to greater macroeconomic stability and recovery while many disagree with merits of recent actions taken by governments, as well as the ignorance of other real problems that should be at the forefront.    Certainly the process reeks with unfairness, but must that be endured to preserve our economy and prevent a disaster?

It’s important to ask ourselves what we are trying to preserve.  GDP?  Employment?  Companies on the brink of ruin?  The “greater good” is certainly not fully measured by any one statistic or indicator, and any attempts to quantify it would be inherently misrepresented.  Many activists present in London clearly seek anything but the preservation of the current system perverse with oppressive and unfair structures that place value in many questionable areas while undervaluing community, equity and the general public good.  The ranks of those vulnerable to exploitation of all kinds would grow tremendously under any transition away from a capitalist system.  There can be hope for a benevolent and autocratic government or an anarchic utopia free of consolidated power, but these hopes are no more realistic than free market idealism.  As it seems to be quite often, the answer (if there is one) lies in the middle ground.

However, these views are surely not the only ones in the crowd of thousands of protesters.  Many others seek to place these values back into the system, making the rules of trade fair and demanding consideration for the unemployed, underappreciated and underprivileged in society.  For those sharing these views, it would not be beneficial for capitalism to collapse, but rather for there to be reform and rethinking.  It is paramount that we ask if the current strategies put forth will truly create results in line with our values.  Only then can we put aside preconceived assumptions on all sides and work towards solutions and a better future.

Bilbao – Model of Sustainable Urban Development

I recently spent five weeks in Bilbao, the principal city of the Basque Country in Spain, during a summer semester study abroad term. Many of us idealize Europe’s sustainable urban development models, citing the high density living and various forms of public transportation as well as a difference in lifestyle choices as very resource-efficient ways of living. Before going to Europe, I had doubts that what I would see would contrast much with the United States. What I found in Bilbao was something very rare in the United States, a medium-sized city allowing complete independence from the personal automobile.
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CNN: American dream has faded into suburban nightmare

The collapse of the American dream or the beginning of a new one?

That’s the issue Lara Farrar explores in an article on CNN.com, relaying a story of how the once typical suburb of Elk Grove, California has turned into an abandoned, unkept, haven for young criminals. Continue reading

Dead Zones

US News & World Report story

It seems there is another unintended consequence of the race to get as much ethanol to the market as quickly as possible. According to the article, acquatic dead zones are growing quickly and scientists link this to extensive increases in fertilizer use. As farms scrabble to keep up with food and fuel demand, they have to use more fertilizer than ever before.

These dead zones are said to be hurting yields of the various fishing industries in the Gulf of Mexico. Naturally, fertilizer run off would be an issue even if we weren’t trying to produce ethanol, but the story plausibly suggests that pressure of having to produce food for a growing population and still have leftovers from ethanol is exacerbating the situation. This reflects why human complacency regarding the sustainability of our society is dangerous. Fertilizers have helped increase yields, but if we don’t act now to manage the runoff, the negative impact on fishing may mean that we get diminishing returns in terms of total food production.

IEA says $45 trillion needed for “energy revolution”

The Paris based agency says the massive investment is necessary to cut dependence on fossil fuels and halve greenhouse gas emissions while maintaining economic growth. Included in this investment would be 1,400 nuclear power plants and a vast expansion of wind power.

AP

Carbon storage and capture systems as well as an eight-fold reduction in carbon intensity in the transport sector would be required. The leader of the IEA’s study put it quite bluntly.

This development is clearly not sustainable.

$45 trillion is a large sum of money, roughly three times current US GDP. However, assuming 3.3% economic growth over the 2010-2050 timeline, $45 trillion would only amount to 1.1% of world GDP. I don’t believe it is safe to assume 3.3% economic growth with energy and food crises headed our way, but forgoing this investment would be catastrophic for both the environment and the world’s standard of living.

A failure to reduce dependence on fossil fuels is setting the world up for a crash when we see large shortages. In addition, climate change is likely to amplify existing problems such as water scarcity and need for more food production. This report should not be ignored, and at least gives a bit of a blueprint for a solution. It is now time for government, and people, to act on a large scale to fight climate change and mitigate peak oil.

In addition, how long will it be before endless growth is realized as an impossible goal?