My article on food processing is not the only economics-related article making its way around the Peace Corps Nicaragua. Another Volunteer recently wrote a blog post about women in micro-finance in Nicaragua. I wanted to take the opportunity of my article being published and the blog post to critique the microfinance system in Nicaragua. It is not providing the kind of economic support that I described in my article. It is not providing the kind of economic support that will create well-paying jobs and the ability for a business to grow.
Before coming to Nicaragua I had heard a lot about micro-finance. I thought that it supported innovative entrepreneurs who wanted to launch new products and services in their communities. I found this extremely appealing.
My first exposure to micro-financing was with León 2000, one of the same micro-financers mentioned in the other Volunteer’s blog post. As a way to get to know the business community in my new site they offered to let me conduct 20 customer satisfaction surveys for them. They were all over the city and I was riding my bike to neighborhoods I didn’t even know existed. It was pretty cool. However, I was disappointed in the types of businesses I was visiting. They ranged from convenience stores to mattress saleswomen, to tortillerías and electronic repair shops in between. However, not one of the twenty small businesses that I visited offered a truly unique product or service. They were all the same old ideas you see all around Nicaragua.
All of these small business owners were entrepreneurs, but they lacked a vital component of success in entrepreneurship: an innovative idea. When more and more businesses saturate the same market they only serve to drive down prices and eat away at their own margins. It is not a recipe for income growth. I was disappointed to see that micro-financers and NGO’s were actively supporting these types of businesses. I don’t doubt that these businesses needed capital, and I do not doubt that these businesses help keep food on the table for millions of Nicaraguans, but they are certainly not driving growth in Nicaragua.
Take the case of the artisan in the other blog post. The Nicaraguan market is absolutely saturated with piggy bank salespeople. Street children roam León trying to sell them to tourists. There are also a few pottery salespeople in the central market. I bought a small piggy bank for C$ 10 there. I use it as a visual aid when I give talks on savings. That’s 36 cents! After taking into account the input costs, the producer and salesperson can only be earning a pittance.
If non-profits are going to continue offering microloans (they are known as micro because they offer far less money than traditional banks, but the capital is sufficient for micro-businesses in developing countries), then they need to emphasize innovation and creativity. They either need to seek out entrepreneurs with new ideas, conduct market studies to identify needs in local markets, or pair their lending with innovation, creativity, and idea generation training. I consider this training for my teaching counterparts and my students one of the most important aspects of my service and something extremely valuable that I can “leave behind” when I leave. One of my main to-dos for the remainder of this year is to plan a teacher training on this very subject (to most likely be delivered in January or February). I’m hoping that the business university I often collaborate with will be interested in hosting the event and contributing expertise.
One theory of commerce and pricing posits that producers are paid based on the amount of value that they add to primary goods. Farmers take dirt and seeds and water and they create edible fruits and vegetables. This is extremely valuable, so we pay them for their produce. However, many other producers take these primary goods and process them into intermediate and finished goods, adding value along the way. Think wheat – flour – bread. That’s a basic chain of value-added production. The more difficult or capital intensive the production, the more value they add, and the greater price they can fetch. Creating a jelly out of mangoes is an involved process, so it earns a greater price on the market than sliced green mangoes. Even more so, processing that uses machines and energy, such as ovens, canning machines and bottlers, tempering machines, mixers and blenders, dehydrators, sealers, pasteurizers, etc., add a lot of value, especially when they extend the shelf life of perishable goods, so their final products fetch a handsome price on the market, especially in the absence of a lot of competition. Unfortunately, most Nicaraguan entrepreneurs are not adding a lot of value to primary and intermediate goods, so they are not generating a lot of income for themselves. Sliced green mangoes abound. And this is just to mention the food sector. The same is true for textiles, metals, chemicals, woods, plastics, and other industries. As you can probably tell, I consider clay piggy banks just some more ‘sliced green mangoes.’
One avenue that micro-financers can pursue is finding small businesses that need machinery and to help finance the machinery. To be fair, there are some organizations in Nicaragua undertaking these projects. BPN in Managua comes immediately to mind, but there are far more organizations trying to organize groups of women and teach them arts skills. Unfortunately, I doubt that this will lead to sustainable development.
I suppose I should admit that this article is a thinly veiled attempt to criticize the current approach to gender and development. After all, this article does directly piggy-back off of a post from the Peace Corps Nicaragua Gender & Development blog. I feel that many organizations and volunteers enter the international development world and immediately declare themselves feminists without considering the philosophical underpinnings of feminism and the economics of female poverty. They lament machismo culture and they being to formulate development schemes like Pro Mujer’s women artisan groups, as featured in the GAD blog post. And in the short run, yes, maybe some previously under-trained and unemployed women will earn an income. But in the long run these schemes will have no impact on the reason that these women were under-trained and unemployed in the first place.
Every now and then I see this meme pop up on the internet and it frustrates me. I lament poverty, whether feminine or otherwise, all over the world. But the fact of the matter is that we do not earn based on how hard we work. We may earn more if we work more, but that is only because we produce more. We create more value. Many women in Africa are poor because they are unfortunately fairly unproductive. They are not adding a lot of value. And ironically, the proof is in the picture; it unravels the quote that so many people attach to the picture. Burning wood for energy is not a particularly efficient source of energy, it has severe negative externalities (deforestation), and hauling wood on one’s back is also extremely inefficient and deleterious to one’s health, eventually making people even less efficient workers in the future. Women in Africa are poor because they are unproductive members of economic society. A successful development scheme should target the reason why this is the case, not simply try to make them more productive.
Now I know that human worth transcends economic productiveness. Women all over the world deserve happiness and dignity regardless of their economic productivity (don’t take me out of context here and turn me into a meme, please!). These objectified women most likely are lacking in these aspects of quality of life, and I support and commend anyone working to correct that. Societal programs and women and girls’ empowerment programs may be important aspects of development as a result. And I am personally no expert in how to approach this aspect of development (or any aspect of development I suppose). However, I do feel strongly that the proponents of gender and development need to explore equality philosophically, socially, and economically, and then come up with programs that target the problem. The current solutions are lacking and simply perpetuating the no-value economy that I see here in Nicaragua.
So that my colleagues on the Gender & Development Committee do not feel picked on, I do want to point out an article in Foreign Policy that I have qualms with. For the most part, I agree with the first part of the article. It also calls into question misguided micro-finance and entrepreneurship programs. However, the second part of the article proposes a refocus in the development community on large-scale urban industrial development. I wholeheartedly agree that industrial parks and free trade zones create jobs. However, they are not well paying jobs and although they can be used to alleviate poverty, I don’t see how they can be relied on to promote development.
In the case of Nicaragua, I have a theory about formal employment and wages. Nicaragua has a small formal sector. The number of companies is fairly small, so they are fairly powerful when it comes to setting the prevailing wage. They can set wages as low as the government will let them. And the government has excellent relations with large businesses in Nicaragua. Many prominent members of the government and the Ortega family are themselves owners and shareholders in large businesses. Due to this influence the government has set very low minimum wages; so low, in fact, that many people don’t find it worthwhile to seek formal employment. They would rather sit around on the sidewalk and slice and sell green mangoes.
Bringing in more foreign factories and industrial parks is not going to set Nicaragua on a path to sustained economic growth. Workers earn low wages and profits go abroad. A few weeks ago I was extremely disheartened while working with my absolute favorite student of this year. We were talking about potential clients for his milk with carao beverage and the wages that they earn. He told me that the absolute best source of employment in León is the Yazaki free trade zone factory, and most people aspire to work there. They earn C$ 4,500 a month, the equivalent of $162.25. It may not be destitute poverty, but it is certainly not the quality of life that I hope to see for Nicaraguans. The Foreign Policy article (which, to its credit, focused on poverty alleviation rather than growth) did itself a disservice by downplaying the impact of entrepreneurship programs. 1. Work with governments to create institutional policies that support growth (what the Foreign Policy article called the “Golden Thread”), 2. Promote creativity and critical thinking in teachers and the formal education system. 3. Promote, finance, and support innovative new businesses, That’s my secret sauce for international development to get the private sector to flourish over time.