In what might qualify as a surrealistic moment, the Administrator of USAID asked a staffer to summarize the policy conclusions of the Vanity Fair analysis for U.S. foreign aid.

That’s from William Easterly’s working paper “Can the West save Africa?” A footnote to the passage reads:

I verified this by getting an actual copy of the memo

…it is impossible to read this year’s text without coming to the conclusion that microfinance is at a crossroads, and that it might do the industry a power of good if it was able to call a “time-out” to reassess its role. In the popular press, microfinance is still very much the developmental flavour of the month – and even the most battle-hardened aid veteran has to acknowledge its appeal as an alternative to the conventional ‘top down’ model for wasting taxpayers’ money. But… microfinance currently faces serious challenges – challenges that have been exacerbated by the global crisis. Should microfinance institutions shift from their essential social role to a (perhaps) more sustainable profit-seeking model? Can they go on relying (as they have done) on subventions of one sort or another from Western investors? Should they develop into more or less full service financial institutions, and become part of the formal financial sector?

That’s from the CSFI‘s Microfinance Banana Skins 2009, available as a free PDF. My answers would be yes, no, more, and yes, respectively.

Treating people as rational means giving them credit to know what’s best for themselves, rather than adopting paternalist policies. If you want to change behaviour (itself a dubious objective requiring much caution) you have to do more than simply educate people. Education only changes behaviour when there was a lack of information before. If there was no dearth of information, education is just the annoying imposition of another viewpoint. It will have little impact except to waste money and annoy those being ‘educated’.

If you really want to change behaviour, give people credit for knowing their own minds, don’t tell them what to think, but change the incentives. This sometimes offers radically different policy solutions.

This theme has recurred a couple of times in the last week: once when examining UK government policy on teenage pregnancy (as part of my MPA studies) and once when reading an article about the book Portfolios of the Poor in The Economist. In the former case, I was struck that government policy both aims to make life better for teenage mothers – providing them with better facilities, better housing, better job and educational opportunities – while also trying to decrease the numbers of teenage mothers through education. Lisa Arai makes a good case that this doesn’t conform to a rational model, where teenage girls have children because that offers them a better life option. In the latter case, people living in poverty have been shown not to be financially naive spendthrifts, but highly sophisticated, rational consumption-smoothers. Applying rational models to these policy challenges produces very different solutions.

In what other areas would assuming rational behaviour make a huge policy difference?

Developing economies could better ride the current financial crisis with more effective maintenance of their natural resources, according to a new report.

The report, from Natural Resource Charter, is here. I haven’t read it, although I am sure it would be interesting. The article references Paul Collier, who pushes a fairly simple system for straight auctions of commodities. It’s worth noting that to some extent, this already happens with commodity extraction rights - so maybe it’s a call to do that better. (The journalists could do better with the headline too: ‘Africa urged to auction commodities’?) However, if they are pushing for African countries to auction raw diamonds, coal and whatever, then they’re recommending a highly statist approach in which governments own the extraction plant and companies. That would be a step backwards. More clever public contract managers (with performance bonuses) in government would be a better solution.

1. Hiring scavengers may be one, basic, reclaimation option, but I think the cost may rule that out.
2. You could offer an incentive for customers to return their banana skins, and pay by weight. In many ways, this is like outsourcing the scavenger option, and doesn’t remove the inefficiency.
3. Grow your own bananas. Then you need some way to make money from the fruit. Drying and chipping may be the best option, or grinding into banana flour.

Option 3 makes me think that banana-chipping outfits probably already exist in some places. So perhaps there is a stock of banana skin waste…. a quick online search turns up Narosa Farms.

Lately, we have encountered substantial obstacles that may affect the
repayment performance of Mifex and its entrepreneurs on the Kiva
website…
In the microfinance industry Mifex is a very young organization. We were
amongst the first institutions to use Kiva for financing and we have
heavily relied on Kiva funds to start our organization. Although Kiva
and the great lenders that support the site have helped our institution
form a strong base for growth, we have recently encountered substantial
obstacles…

A shortage of capital, combined with escalating default rates, has put a
heavy strain on our operation. Many of our clients are also having a
very difficult time making their repayments due to the persistent rains
during the first half of the year. These factors have caused Mifex to
accumulate a debt to Kiva lenders that we cannot pay without putting in
danger the sustainability of our organization.

My thoughts? A shame, but not a tragedy. Investing in any asset class attracts risk. I accepted this risk when I signed up. I reinvest my recouped loans from Kiva into other Kiva businesses, so the main effect of bad debt is the reduce the capital I make available to other entrepreneurs. However, I wonder to what extent I would be this relaxed about bad debt through on a system such as Zopa, where I loan money on commercial terms. I’d like to think that I would be able to put that in perspective as well – but something tells me that my disappointment (and annoyance?) may be greater.