Stanford Social Innovation Review

Patient Optimists

I’m not an “impatient optimist” like Bill and Melinda Gates. When it comes to making the world a better place, I think impatient optimists are quite possibly a part of the problem, not part of the solution.

Led by some terrific organizations, the nonprofit and social entrepreneurship sector is generating solid evidence on the effectiveness of programs aimed at alleviating poverty, combating homelessness, preserving natural resources, and the like. The Obama administration has embraced this emphasis on rigorous evidence—and caused many in the sector to raise the specter of “epistemological nihilism” or paralysis due to demands for proof that is too hard and expensive to generate.

The real problem, and the real fear, among nonprofits and social entrepreneurs is not the difficulty and expense of finding evidence, however—it’s that the changes realized are often small ones. Indeed, sociologist Peter Rossi has gone so far as to coin the Stainless Steel Law of Evaluation: “The better designed the impact assessment of a social program, the more likely is the resulting estimate of net impact to be zero.”

There’s good reason for this, and it’s not a flaw of evaluation. It’s that human beings, political systems, economic systems and the social problems they create are complex. Despite this basic fact, the nonprofit sector and, increasingly, social entrepreneurs have told us for years that small donations or investments can “change lives” or make other huge impacts. It’s obvious why they do this—to raise money. But it also sets ridiculously high expectations among the general public. That’s why evidence that microfinance has had a small but positive impact in poor rural communities has been portrayed by some as a “failure.” To quote Esther Duflo,  a co-founder of Jameel Poverty Action Lab and recent winner of a MacArthur “genius” grant: “[Microfinance is] useful, but it’s not like the miracle drug to end poverty.” The only reason we would expect it to be a miracle drug is that we were told it was.

Who’s telling us that? You guessed it—the impatient optimists. They’re doing it for understandable reasons. The needs are great; big solutions seem like the right way to fix big problems; and it seems cruel not to try to fix such pressing problems quickly. So if a program shows some promise, it’s quickly promoted as a “solution.” Only later do we learn that early results aren’t replicable, the program doesn’t work at scale, or the benefits are far more modest than initially advertised. The impatient optimists run the risk of producing inspired donors in the short term and cynics in the long term.

What’s the solution? Patient optimism—a view that combines the belief that change is possible with the belief that any significant transformation takes a great deal of time and effort. It recognizes that programs that produce small or marginal benefits even for a small portion of aid recipients are good programs. It funds continued experimentation to find ways to achieve a little bit more with each dollar. It doesn’t believe in silver bullets but is willing to place small bets on risky innovations with potentially high returns.

What’s an example? Deworming. Hundreds of millions of children suffer from a variety of parasitic worms and treating them is both low cost (usually less than $2 per child) and has a large impact on school attendance. However, we know that in the same locales where worms are a problem, the children don’t learn much when in school because of failures of the education system. Does that mean that we shouldn’t fund deworming? Absolutely not. But we should do so with the full understanding that we’re not likely to see large gains in educational achievement as a consequence any time soon. That doesn’t mean we need to try to fix everything at once—which doesn’t work either—but that we should make what small improvements we can, where we can. Deworming will improve lives in many ways other than test scores and will allow the people who benefit to take more action to help themselves.

Impatient optimists are like investors in subprime mortgages in 2007. They can be so blinded by the upside that they fail to do their due diligence. In the end, their impatience and pursuit of outsize returns fuels waste and disappointment. Patient optimists, by contrast, have lowered their expectations of any particular program or intervention, but not their belief in a better world over the long term. If we’re going to succeed in making the world a better place, we need to convince more people to lower their expectations, too. Then we can get about the work of trying, failing, learning, improving—and truly making the world a better place.

Tim Ogden is Executive Partner at Sona Partners, a thought leadership communications firm. He has edited 4 books on the intersection of business strategy and technology published by Harvard Business School Press and co-authored or ghostwritten several articles for Harvard Business Review. He is frequently quoted in the Wall Street Journal, New York Times, and Financial Times.

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How to Help Haiti

Key Points

• It is important to figure out why you want to donate to Haiti and what you hope your donation will accomplish.
• Donors should consider supporting long term development in Haiti or disaster preparedness as a worthy alternative to short term disaster relief.
• Donors who want to support disaster relief efforts should consider donating to Partners in Health.

I’ve been asked by many people how they can best provide support in the wake of the Haitian earthquake. However, picking nonprofits on behalf of our clients is really not what we get hired to do. As our website says, “It is not our job to tell you where to give. Instead, we work to empower our clients with the knowledge and expertise they need to make the best decisions about their philanthropy.”

While which nonprofit you fund has important implications, figuring out what you’re trying to accomplish in the first place is critical. So let’s look at how a donor might think about the role they want to play.

First off, we need to understand that while the Haitian earthquake has its own unique issues, it is a disaster relief scenario which means we can learn from other similar situations. Tim Ogden had this advice in the Harvard Business Review:

Take a look back at the responses to other recent disasters. There is a discernable pattern, and not a good one:
1. Donations spike in the immediate aftermath.
2. A huge portion of the funds donated are spent on setting up disaster-relief operations that are no longer the primary need.
3. A flood of cash and materials cause a logistics nightmare leading to waste and ineffectiveness, if not corruption.
4. Six months later, reconstruction stalls because the world’s attention has moved elsewhere.
5. And, finally, a series of reports bemoan the fact that too many funds are devoted to disaster relief and not enough to disaster preparedness and reconstruction.

I don’t mean to suggest that donors should not send cash now to help in the relief effort. But it is important for donors to realize that doing so is not the only option. The fact is, the Haitian earthquake is just as much a poverty issue as it is a natural disaster as David Brooks pointed out in the New York Times:

On Oct. 17, 1989, a major earthquake with a magnitude of 7.0 struck the Bay Area in Northern California. Sixty-three people were killed. This week, a major earthquake, also measuring a magnitude of 7.0, struck near Port-au-Prince, Haiti. The Red Cross estimates that between 45,000 and 50,000 people have died (Note:Estimated deaths now at 200,000)
This is not a natural disaster story. This is a poverty story. It’s a story about poorly constructed buildings, bad infrastructure and terrible public services.

What this suggests is that donors should consider whether providing support for long term rebuilding in Haiti (or other areas) makes sense for them or whether they might look at disaster preparedness as a cause they want to support. The point here is that the Haitian earthquake is not a simple story. There are many underlying issues and donors should give some thought to what it is about the event that moves them to give.

The charity evaluation group GiveWell wrote a post over a year ago title The Case Against Disaster Relief  in which they looked at how disaster relief is not a particularly cost-effective use of a donor’s gift and why disaster preparedness might be better. But even if this is true, the world needs high performing disaster relief organizations. So donors who want to support the urgent relief efforts would be well served to make an unrestricted gift to an organization that can use the funds now in Haiti and also use them to grow and improve their organization so they are ready to help when the next disaster strikes.

While there are a number of organizations that are viable options for a donor who wants to support disaster relief, we would recommend that donors consider Partners in Health (PIH). PIH is a community-based health care provider that works with poor people in developing countries. Their flagship project is located in Haiti and is one of the largest nongovernmental health care providers in the country. Partners in Health has received large grants from the Bill & Melinda Gates Foundation and is recommended by GiveWell and The Center for High Impact Philanthropy at the University of Pennsylvania (as well as many other reputable sources). PIH was co-founded by Paul Farmer, a bit of a rock star in the development world, was widely expected to be nominated to run USAID and many people thought was the best pick for the job.

One of the advantages of supporting PIH is that they are on the ground in Haiti now and can deploy your donation towards near tern relief work and for the long term support of health care needs in Haiti and other poverty stricken, developing nations. While donor’s hearts may go out to Haiti today, when an earthquake next strikes an impoverished nation it is critical that groups like Partners for Health are in top operating condition and ready to help.

We believe that good philanthropy is a product of having a good plan in place and fully understanding what you are trying to achieve. Which nonprofits you support is of course important, but that question can only be answered once you realize what you are trying to accomplish.

Sean Stannard-Stockton is CEO of Tactical Philanthropy Advisors, a philanthropy advisory firm that serves individual and family philanthropists. Sean is the author of the Tactical Philanthropy blog and writes a monthly column for the Chronicle of Philanthropy. He is a member of the World Economic Forum’s Council on Philanthropy & Social Investing and has been quoted or referenced in The New York Times, Wall Street Journal, Washington Post, Financial Times and many other media outlets.

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Federal Bailout Spending Creates Public/Private Collaboration Opportunities

We usually think of nonprofit collaboration only in terms of charitable organizations, but does government collaborate as well? I recently learned about an interesting example of a government-led collaboration effort focusing on the American Recovery and Reinvestment Act, more commonly known as the federal bailout. The process of determining how to spend bail out dollars in the Northern Illinois is being led by the Chicago Metropolitan Agency for Planning, or CMAP. CMAP is the official regional planning organization for northern Illinois. From day one, CMAP was having high-level discussions about the best way to use the Chicago region’s influx of bail out dollars in the most productive way with the goal of achieving higher quality results. Recently I attended a presentation where Randall Blankenhorn, the Executive Director of CMAP explained their approach to disperse American Recovery and Reinvestment Act funds. Mr. Blankenhorn made a perfect argument for how it’s critical when presented with such tremendous resources - $14 billion for the Chicago metropolitan region – to leverage that capacity to create more accountability and to experiment with restructuring the delivery of services in the region.

Mr. Blankenhorn explained that as early as November 2008, in the very early days of the discussion of a bailout bill, CMAP’s board approved a set of principles for how the funds should be spent in northern Illinois. One of these principles is: The investments should be partnered for real reform. To prioritize local infrastructure investments that in a comprehensive way look beyond transportation benefits to include land use, economic, environmental, social, and other impacts.  In other words, let’s not look at these issues as silo arenas. Instead, let’s weave the strategies together to create comprehensive solutions and leverage the impact of the investment to re-position the region and its services for the future.

To accomplish its goals, CMAP is partnering with foundations, nonprofit organizations, and public agencies throughout the region in a coordinated, accountable fashion. We are fortunate to have CMAP leading the process for investing American Recovery and Reinvestment dollars here. Do you have examples of good government collaboration you want to share? Post a comment with your own example.

Jean Butzen, Mission Plus Strategy consulting, specializes in mergers and alliances in the Chicago area.

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Corporate givers regroup in recession

Charities trying to figure out where corporate citizenship may be headed should look at new study by The Hitachi Foundation and the Boston College Center for Corporate Citizenship.

The study, “Weathering the Storm: The State of Corporate Citizenship 2009,” says 54 percent of over 750 corporate executives who responded believe corporate citizenship is even more important in a recession.

Companies increasingly are trying to build corporate citizenship into their business strategy and to link their actions and investments with principles of corporate citizenship, the study says.

And despite the recession, most businesses maintained their attention to corporate citizenship and their budget for it, while others increased their commitment.

While cutbacks and misconduct have eroded trust in business, “business leaders understand that corporate citizenship in our country entails great responsibilities as well as extensive rights,” Barbara Dyer, president and CEO of The Hitachi Foundation, says in the report. “Most are diligently working and investing toward improving their efforts to more fully meet these responsibilities.”

With 70 percent of executives who responded saying reputation is its main driver, the study says, companies have increased their internal and external communications about corporate citizenship.

Fifty-four percent now communicate with employees on the issue, and 39 percent talk about it with stakeholders.

While most U.S. companies are not making changes in their corporate citizenship practices, the study says, 38 percent of those that are making changes have reduced their charitable giving, 27 percent have increased layoffs and 19 percent have trimmed research and development for sustainable products.

And 83 percent of large companies support employee volunteering.

Rated by executives as the top three areas of corporate citizenship are ethical business practices, treating employees well, and managing and reporting company finances accurately.

Most senior executives believe business should be more involved in taking on major public issues, the study says, with 65 percent saying business should get more involved in the national debate on health care.

Big companies are responding differently than small firms, the study says.

Large firms are making big increases in their investment and involvement in citizenship work but are more likely to lay off employees, while small firms have limited layoffs but made big reductions in other areas of citizenship.

Corporate citizenship certainly is more than money, although money certainly matters to nonprofits.

Corporate giving, which falls under the umbrella of corporate citizenship, totaled $14.5 billion in 2008, or only 5 percent of overall charitable giving in the U.S. according to Giving USA 2009.

And corporate giving fell that year by 4.5 percent, or by eight percent in inflation-adjusted dollars.

With companies becoming more strategic in their giving and tying it more closely to their business and bottom line, nonprofits also should be more strategic in developing corporate partnerships.

Nonprofits should be working to team up with companies in ways that will generate not only the contribution of corporate dollars but also ongoing relationships that will build a pipeline of other resources that include in-kind support, employee volunteers and expertise, and corporate sponsorships and connections.

Doing good can be good business, and business can be a good partner for the giving sector.

Todd Cohen, a veteran news reporter and editor, is editor and publisher of Philanthropy Journal, an online newspaper published by the A.J. Fletcher Foundation in Raleigh, N.C. Cohen has taught nonprofit reporting and media relations at the University of North Carolina at Chapel Hill and at Duke University, and regularly speaks on the topics of nonprofit media relations and trends in the charitable world.

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Nonprofit Accounting Rules Not the Solution to For-Profit Accountability

In The New York Times Feb. 17 op-ed, “Soup Kitchen Accounting,” Dietrick and Granof suggest that the banks now being bailed out with our tax dollars need to be held to strict public account and therefore should take a page from the nonprofit accounting manual. God forbid. We do not approve of torture.

If the question is how to make banks more functional, or how to ensure that they are now doing the right thing for us with our collective investments, you have to look elsewhere. To be sure, banks requiring public money to bolster balance sheets or fund unprofitable operations should be required to account for themselves, fulfill explicit objectives and—well—deliver.  But nonprofit accounting is a fast track in the wrong direction.

No matter how badly the money center banks have been managed (and these folks have evidently broken all previous records on a number of counts), they don’t deserve the dysfunctional, punitive accounting rules that hamstring the nonprofit sector now.  Our rules are management-unfriendly in numerous and inordinate ways. They violate the matching principle, conflate regular operating revenue with capital infusions (to general puzzlement of boards, funders and managers) and faithfully reinforce a sector-wide logic error:  the substitution of inputs (how, in dysfunctional and paralytic detail, did you spend the money?) for a metric of true transparency—results (what happened as a result of spending the money?)  This has let to a debilitating sector-wide obsession with meaningless benchmarks such as overhead rate and fundraising expense—to the detriment of understanding what works, robust capitalization and constantly improving results. 

And thus to the banks. We need to look at the banking system for what it is, necessary public infrastructure. And the goal here is to save them from failure.  Beyond the blood sport of punishing them, our enlightened self interest would encourage us to seek solutions that allow them to recover.  And that would include returning them to profitability.  And an uncomfortable “aha” for us is that for money center banks, conventional lending of the type we need to be able to lubricate the economy is largely unprofitable.  Moreover, most banks now accommodate two or three shadow decision-makers in the person of regulators from the OCC, FDIC, Federal Reserve and others. Several layers of bureaucratic and regulatory oversight has already slowed loan production, workouts and operations, reducing already narrowed margins to zero and demoralizing the last bank staff standing.  We can tell you…nonprofit accounting would be the final straw.  Nonprofit accounting takes us far, far away from the ownership information that we, the outraged – and reluctant – equity holders should expect.

The authors’ point about accountability is reasonable, but their conclusion is not.  As the adage goes, “accountant, heal thyself!”  The conclusion should be that if the trusted professional infrastructure of the economy—bank regulators, bond rating agencies, consulting firms, securities dealers and yes, accountants—had been doing their jobs with the perfectly adequate tools that for-profit accounting and disclosure rules provide, we might not be in this mess.  And then the nonprofit sector, (hampered as it is with an obfuscatory and expensive set of accounting rules) would not be cleaning up the human damage with food banks, homeless shelters and emergency medical clinics.

Clara Miller is President and Chief Executive Officer of Nonprofit Finance Fund (NFF), the only national financial intermediary exclusively committed to social sector finance. Miller speaks and writes extensively about nonprofit capitalization and finance, and has been published recently in the Financial Times, the Chronicle of Philanthropy, Community Wealth Vanguard, Stanford Social Innovation Review, the Nonprofit Quarterly, and Worth Magazine.

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Reviewing the Past, Predicting the Future

Ah, December. The anticipation of snow, unless you’re already several feet under. The warmth of a fire, unless you live in the south.  The excitement of winter holidays, unless you’re a grouch. Don’t forget the thrill of reviewing the year gone by and the accuracy of previous prognostications, while also prepping for the foolhardiness of sticking your neck out yet again and claiming trends, key changes, and buzzwords for the year to come. Ah, December.

Last year at this time on this very site I made several rather rash predictions. Briefly, they were:

1. One of the many philanthropic prizes launched in 2007 will succeed in motivating the solution it seeks;
2. At least one-third, and maybe as many as one-half of the world’s top 10 largest gifts in 2008 will be made by non-Americans to non-American institutions;
3. The lines between political giving, embedded giving, and giving will continue to blur;
4. Half of the glossy magazines dedicated to giving, launched in 2006 or 2007, will fold in 2008; and
5. Nothing significant will happen to the regulatory structure that shapes philanthropy in 2008.

My full accounting of these predictions can be found here in this article, “Alliance Magazine You can find additional discussion of it here and here  .

In brief, I was right on numbers three and four, wrong on number one, and we don’t have the data yet to assess number two. Number five was so poorly worded (my fault) that I can claim to be correct simply by being selective about which regulatory frames I meant. Apologies—I’ll do better next time. In that same post I also identified six trends or events that would matter to philanthropy in 2008. They were:

1. The economy
2. Health care finance will start down the same slope as subprime mortgages
3. Metrics
4. Markets
5. Bill Gates will go full-time
6. Race and age will matter

It is pretty clear in December 2008 that the economy and health care finance have profoundly shaped the direction of philanthropy in the last year—to say nothing of their effect on the U.S. presidential election. Discussions of metrics and markets were plentiful and some progress has been made—from the Acumen Fund’s Portfolio Data Management System and mainstream media’s attention to metrics to conferences on Social Capital Markets and the buzz around philanthrocapitalism. Bill Gates as philanthropist has garnered attention from his speech on creative capitalism to his retirement in June to his launch of a new company to the rapt attention paid to the Foundation’s investment policies and grants budgets. And, finally, the sector is beginning to pay real attention to racial diversity of leadership, grantmaking, encore careers, and next generation leadership issues—plenty more to be done, but I’d argue these issues have moved out of the wings and into the center of the room.

So what about 2009? Here are some thoughts. I’ll be back with more:

1. I’m going to recycle prediction number two from 2008—big giving is going to come from off America’s shores in 2009—we’ll see at least 30 percent of the year’s biggest gifts coming from/going to non-Americans. And we’ll have data to show this.
2. The number of nonprofit organizations in America will shrink through mergers and organizations going out of business. Paul Light has pegged this decline at 100,000 organizations or just fewer than 10 percent of the whole. Others I know are predicting shrinkage in numbers of up to 25 percent.
3. On the other hand, social enterprises will increase. President-elect Obama is promising investment in them and has already established a working group on social innovation. Necessity is the mother of social innovation. One problem—we don’t have any accurate or longitudinal counts (or even definitions) of social enterprises—so I can’t be wrong on this, because we don’t have data. (What an opportunity….)
4. Related to number three, but not synonymous: new corporate structures, such as B Corporations and L3Cs will significantly expand in 2009. B Corps will double in number and market reach.
5. Overall giving in the U.S.A. from all sources (foundations, individuals and corporations) will drop in real dollars in 2009 compared to 2008. (There I go again, sticking my neck out.)
6. The market of online giving marketplaces will mature – we’ll see this in shrinkage and consolidation (there are more than 120 of these now, they’ll be fewer than 100 this time next year) and the solidification of market leaders.
7. Social action by young people and elders will keep us hopeful.

What do you think? What do you predict? What will you stick your neck out about?

Lucy Bernholz is the Founder and President of Blueprint Research & Design, Inc, a strategy consulting firm that helps philanthropic individuals and institutions achieve their missions. She is the publisher of Philanthropy2173, an award winning blog about the business of giving and serves as Executive Producer of The Giving Channel on Fora.tv.

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Kiva Introduces Lending Team Feature

About four and a half years ago, I was on a plane to Kenya, about to begin a new job doing microenterprise development throughout East Africa. The next three months would change my life, as I’d meet more than 100 entrepreneurs whose stories would inspire the creation of Kiva.

Kiva is the world’s first person-to-person microlending Web site, empowering individuals to lend directly to an entrepreneur in a developing country. Combining microfinance with the power of the Internet, Kiva is creating a global community of people connected through lending.

From a handful of friends and family lending $3,000 to seven entrepreneurs in Uganda, in less than three years since Kiva’s inception, the organization has facilitated nearly $40 million in loans from 330,000 lenders to 60,000 entrepreneurs worldwide.

Kiva has had a number of outstanding corporate partners along the way who have catalyzed our work and helped us create a long-lasting Internet public good. PayPal, for instance, provides Kiva with access to technology, research, workplace resources, employee volunteers, and free payment processing (Kiva’s largest variable cost), thus enabling 100 percent of the loaned funds to reach entrepreneurs in developing countries. Oliver Wyman provides dedicated, ongoing support from their consultants, who spend between four to six months at Kiva’s San Francisco office working alongside Kiva staff to tackle pressing business issues. Yahoo! provides free Yahoo! Search Marketing keywords, and several Yahoo! employees are helping Kiva develop a more robust online platform. There are many more. We’re deeply grateful to all of these innovative, socially-minded organizations for their partnership.

And we’ve been thinking more and more about the individuals who make up those companies, and the tools they need to work together on Kiva more easily. Soon, Kiva will make it even easier for any group of individuals—whether a corporation, school, religious organization, family, or group of friends—to get involved as a group, and show organization-level support.

This fall, Kiva will launch a new feature allowing Kiva users to create or join lending teams. Each lending team will have a page on the Kiva Web site to track and summarize the lending activity of all individual lenders associated with that team.

The way Kiva works is not changing. People will still make loans as individuals. But now, they’ll also have the added option of teaming up with like-minded lenders, inviting others to join in and having their loans count towards a team total. Our hope is that lending teams will provide an easier way for Kiva enthusiasts to spread the word at work, at school, and elsewhere. Keep an eye out for this exciting new feature!

Kiva operates on a simple, but powerful premise: A loan of $25 can change a life. We hope lending teams encourage people to get involved and then involve others in a meaningful way.

Jessica Jackley Flannery cofounded Kiva, the first peer-to-peer microlending Web site, and believes that microfinance, relationships, and stories are powerful tools for change. She holds an MBA from the Stanford Graduate School of Business.

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Chinese Activity in Africa, Part 2: The Path of Least Resistance

This post is the second in a two part series exploring China’s role in Africa’s development. Part 1 focused on the breakdown and impact of African exports to China, and Part 2 focuses on the role of China’s investment and imports into Africa.

Investment

It is no surprise that most Africans are welcoming Chinese investment and products. The history of traditional Western aid and investment in Africa is one of a nagging “I correct you because I want what’s best for you” parental-like stronghold over the continent. Tired of “the politically motivated, finger-wagging approach of western governments,” numerous sources quote the lack of political motivation, as well as societal or environmental demands, as one of the primary reasons that Africa is welcoming the Chinese investment.

Sahr Johnny, the Sierra Leonean ambassador in Beijing, was quoted as saying the following regarding China’s projects in Africa:

“The Chinese are doing more than the G8 to make poverty history. If a G8 country proposes a project for Sierra Leone, there is an environmental assessment and evaluation of the human rights and governance situation. The Chinese just come and do it.”

Despite the claims of poverty reduction, the reality is that the aid flowing from China is not designed to alleviate poverty, as opposed to aid from the World Bank and the IMF, which falls under the category of “office of development assistance.” Therefore, it is not subject to social and environmental assessment. The assistance from China is purely aimed at promoting trade and development for China. Therefore, when an issue like the Darfur crisis in Sudan arises, China slyly steps aside and claims that its role is not to police other countries.

While this lack of social and environmental benchmarks may worry some, others praise the fact that much-needed investment has been able to flow freely into Africa. Some of the key areas of Chinese investment, which align with improving the efficiency of resource extraction, are telecommunications, energy, and physical infrastructure. These areas have traditionally been ignored by donors in Africa, who have instead favored social development programs such as education and health.

Although the money is flowing in, Africans have expressed concern regarding whether or not these investments will add long-term value in the sense of technology transfer, education, and opportunities for Africans. At the amazing blog Global Voices, a young Malawian girl questioned, “Am I being idealistic in hoping that they will teach us their unique skills in building and pass the construction mantle back soon after?”

Products and Services for the African Market

Not only has China offered investment in infrastructure, but there has also been an influx of Chinese products in Africa, which has rallied critics from both ends of the spectrum. According to the article “The Strategic Entry of China’s Emerging Multinationals into Africa,”

“…the Chinese multinationals have become adept at identifying so-called ‘market blind spots’, market areas that have essentially been neglected and under-capitalised. These are typically cheaper product lines that may not seem to be money spinners, but which would actually stimulate demand once available.”

Examples of these are Haier’s smaller refrigerators and Lenovo’s C100 laptop, targeting small and medium enterprises. Huawei provided the international market with low-end routers that were 40 per cent cheaper than other products, capturing 3 percent of the global market by 2002.

From that, it sounds as if the Chinese products are giving African people more choice, and filling market gaps. However, there are worries about the safety of the extremely cheap Chinese goods. If an exporter can’t pass FDA inspections, it may still be able to slip its products into African markets.

China as a Model for Development

Lastly, if you look beyond the investments and new products, and consider China a model of development that may provide a tutorial for Africa, it is both exciting and worrisome. A working paper issued by the World Bank in February of this year, titled “Lessons from China for Africa” is focused on the fact that “other developing countries struggling to grow and reduce poverty are naturally interested in what has been the source of this impressive growth and what, if any, lessons other developing countries can take from China.”

For those who are looking solely at economic indicators, China has lifted 300 million people out of poverty with unimaginable speed. China certainly did not achieve this success through a dependence on Western aid and structural adjustments.

Could China do the same for Africa?

The situation that has emerged in China, albeit economically prosperous, may not be the pathway that most would like to imagine for Africa. China may have tackled poverty, but what about inequality? While China has started to embrace the market philosophy from the West, the adoption of the freedoms that are usually associated with a democratic system is another story. You could trip over the number of examples of human rights violations in China, from incarcerated activists to the infamous “great firewall.”

What is happening in Africa right now clearly demonstrates a seemingly simple distinction that we may all sometimes forget to make; poverty and inequality are not one in the same. And, if poverty is addressed, will inequality then follow suit?

* For a more in depth version of this article please visit NextBillion.net

Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.

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Chinese Activity in Africa, Part 2: The Path of Least Resistance

This post is the second in a two part series exploring China’s role in Africa’s development. Part 1 focused on the breakdown and impact of African exports to China, and Part 2 focuses on the role of China’s investment and imports into Africa.

Investment

It is no surprise that most Africans are welcoming Chinese investment and products. The history of traditional Western aid and investment in Africa is one of a nagging “I correct you because I want what’s best for you” parental-like stronghold over the continent. Tired of “the politically motivated, finger-wagging approach of western governments,” numerous sources quote the lack of political motivation, as well as societal or environmental demands, as one of the primary reasons that Africa is welcoming the Chinese investment.

Sahr Johnny, the Sierra Leonean ambassador in Beijing, was quoted as saying the following regarding China’s projects in Africa:

“The Chinese are doing more than the G8 to make poverty history. If a G8 country proposes a project for Sierra Leone, there is an environmental assessment and evaluation of the human rights and governance situation. The Chinese just come and do it.”

Despite the claims of poverty reduction, the reality is that the aid flowing from China is not designed to alleviate poverty, as opposed to aid from the World Bank and the IMF, which falls under the category of “office of development assistance.” Therefore, it is not subject to social and environmental assessment. The assistance from China is purely aimed at promoting trade and development for China. Therefore, when an issue like the Darfur crisis in Sudan arises, China slyly steps aside and claims that its role is not to police other countries.

While this lack of social and environmental benchmarks may worry some, others praise the fact that much-needed investment has been able to flow freely into Africa. Some of the key areas of Chinese investment, which align with improving the efficiency of resource extraction, are telecommunications, energy, and physical infrastructure. These areas have traditionally been ignored by donors in Africa, who have instead favored social development programs such as education and health.

Although the money is flowing in, Africans have expressed concern regarding whether or not these investments will add long-term value in the sense of technology transfer, education, and opportunities for Africans. At the amazing blog Global Voices, a young Malawian girl questioned, “Am I being idealistic in hoping that they will teach us their unique skills in building and pass the construction mantle back soon after?”

Products and Services for the African Market

Not only has China offered investment in infrastructure, but there has also been an influx of Chinese products in Africa, which has rallied critics from both ends of the spectrum. According to the article “The Strategic Entry of China’s Emerging Multinationals into Africa,”

“…the Chinese multinationals have become adept at identifying so-called ‘market blind spots’, market areas that have essentially been neglected and under-capitalised. These are typically cheaper product lines that may not seem to be money spinners, but which would actually stimulate demand once available.”

Examples of these are Haier’s smaller refrigerators and Lenovo’s C100 laptop, targeting small and medium enterprises. Huawei provided the international market with low-end routers that were 40 per cent cheaper than other products, capturing 3 percent of the global market by 2002.

From that, it sounds as if the Chinese products are giving African people more choice, and filling market gaps. However, there are worries about the safety of the extremely cheap Chinese goods. If an exporter can’t pass FDA inspections, it may still be able to slip its products into African markets.

China as a Model for Development

Lastly, if you look beyond the investments and new products, and consider China a model of development that may provide a tutorial for Africa, it is both exciting and worrisome. A working paper issued by the World Bank in February of this year, titled “Lessons from China for Africa” is focused on the fact that “other developing countries struggling to grow and reduce poverty are naturally interested in what has been the source of this impressive growth and what, if any, lessons other developing countries can take from China.”

For those who are looking solely at economic indicators, China has lifted 300 million people out of poverty with unimaginable speed. China certainly did not achieve this success through a dependence on Western aid and structural adjustments.

Could China do the same for Africa?

The situation that has emerged in China, albeit economically prosperous, may not be the pathway that most would like to imagine for Africa. China may have tackled poverty, but what about inequality? While China has started to embrace the market philosophy from the West, the adoption of the freedoms that are usually associated with a democratic system is another story. You could trip over the number of examples of human rights violations in China, from incarcerated activists to the infamous “great firewall.”

What is happening in Africa right now clearly demonstrates a seemingly simple distinction that we may all sometimes forget to make; poverty and inequality are not one in the same. And, if poverty is addressed, will inequality then follow suit?

* For a more in depth version of this article please visit Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.

 

 

 

 

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Chinese Activity in Africa, Part 1: Feeding the Dragon

This post is the first in a two part series exploring China’s role in Africa’s development. Part 1 focuses on the breakdown and impact of African exports to China, and Part 2 focuses on the role of Chinese investment and imports in Africa.

I think that those of us who are interested in the potential of market-based development need to initiate a conversation around one of the biggest elephants in the room, and that is the role that Chinese foreign direct investment (FDI) and aid is playing in Africa’s development. In particular, how this inflow could fuel potential base of the pyramid (BoP)-focused enterprises and mean new opportunities in both employment and a greater access to choice in goods and services for BoP consumers.

I became interested in doing this piece on a recent trip to Hong Kong, where I was studying strategies that have been taken to propel corporate social responsibility in Asia. One morning at breakfast I came across the headline, “China’s Investments ease Africa’s Poverty, says World Bank report” in the South China Morning Post. This July 12th headline grabbed my attention, as it was clearly at odds with those I had been seeing in the U.S., such as last August’s New York Times story entitled, “China’s Trade in Africa Carries a Price Tag.”

So, which is it? Clearly, the two seemingly opposing articles demonstrate that this is a very divided issue, and the strong journalistic stances risk convincing people one way or the other, when the reality of the effect is probably somewhere in the middle.

As China and Africa’s economic relations have strengthened, on some indicators, life has improved for those Africans at the BoP. Some are able to access cheaper, “Made-in-China” products, while others have benefited from the much-needed investment in infrastructure, which has contributed to everything from energy to ICT development. However, many argue that China’s no-strings attached aid packages ignore some of the structural changes that need to occur to ensure long-term peace and prosperity in the region, and that cheap Chinese goods have crowded out native industries.

The World Bank seems to be optimistic, saying that China’s “newfound interest in substantial international commerce with Africa—home to 300 million of the globe’s poorest people and the world’s most formidable development challenge—presents a significant, and in modern times, rare, opportunity for growth, job creation, and the reduction of poverty on the Sub-Saharan continent….”

While the prospects for job creation and poverty reduction surrounding greater exports are promising, there should be valid worries when it comes to the social and environmental implications of this resource plunder. According to the World Health Organization, developing nations, which emit the fewest greenhouse gases, will have the most serious problems associated with climate change. The jobs afforded to those in extractive industries are dirty, dangerous and unpredictable.

In addition, from a long-term poverty-reduction standpoint, the tiny percentage of value-added goods being exported, the minimal technology transfer, and the lack of skill development does not bode well for the hope of sustainable change. And while U.S. and European companies certainly do not have a clean history in Africa, they are now under much greater social and environmental scrutiny, while Chinese firms appear to be operating with little or no oversight.

One of the most comprehensive journalistic pieces on this topic that I came across was the May 2008 Fast Company Series Special Report: China in Africa. Author Richard Behar traveled to Mozambique, Zambia, The Democratic Republic of the Congo, and Equatorial Guinea in the six-part special. After all of his travels, he came to the conclusion (primarily through visiting extractive resource sites) that Africa is bearing the brunt of China’s massive energy and resource needs that are fueling the established Western and newfound hyperactive Eastern consumer economies. He compared China to a parasite infesting the Sub-Sahara, saying that the Chinese are, “there to get what they need to feed the machine.”

What Behar found was that, “while flat-footed Western governments largely watch from the sidelines, cash-flush Chinese firms—many with state-directed financing—are cutting deals at a dizzying pace, securing supplies of oil, copper, timber, natural gas, zinc, cobalt, iron, you name it.”

China needs Africa, and it has offered much in return for the resources that are driving its booming economy. However, the questions that we need to consider are, what does this means for those living at the BoP and, what role will the civil sector take in this changing landscape of south-south development relations? Should we point a finger at Chinese companies for potentially stripping Africa of its natural resources, or should we instead encourage this much-needed investment and potential job opportunity?

Or, in this case, should we step aside and suppress our White Man’s impulses to apply what Easterly would call the “intellectual hubris at the top that disdains the messy realities at the bottom?” According to some Africans, they welcome the partnership with China because China “treats them like a peer.”

* For a more in depth version of this article please visit NextBillion.net

Grace Augustine is a research associate with the William Davidson Institute, an educational institute focused on researching and supporting organizations in emerging markets. She writes for the NextBillion blog and has an interest in economic development and clean technology for the world’s poorest citizens.

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