Engagement opportunities in education

Which areas in school education can deliver the biggest bang for the buck? For non-governments seeking 'big bang' engagements in education, I can think of three exciting opportunities.

1. There is now a well endowed body of research which confirms that children learn along varying trajectories and speeds. This means that the standard one-size-fits-all classroom instruction is very inefficient. Instead instruction should be customized to the specific need of each child. But the human resources necessary to do this makes it a non-starter, especially in developing countries with large classroom sizes and vast differences in learning levels. It is in this context that adaptive learning systems assume significance.

I am going to stick out my neck and say that adaptive learning systems are the future of education, at all levels. In simple terms, an adaptive learning system gradually leads the student up his or her unique learning trajectory - each student has a specific learning trajectory which is dependent on antecedent learning levels and the student's pace of learning - using the computer as the interactive learning device, with appropriate facilitation by the class teacher.

The effectiveness of any adaptive learning system depends on its learning trajectory algorithms, which is in turn dependent on the volume and diversity of student learning data from which it was developed. As the depth and breadth of data analysed increases, more variations of concept learning mistakes and their speeds of learning becomes available, which in turn enhances the library of learning trajectory algorithms. At its most efficient and ideal, the library should be rich enough that a student can start a grade and move on the most appropriate learning trajectory to achieve all competencies for that grade in the shortest possible time.

2. Fundamentally, achieving grade-specific basic competency in math and languages is about mastering a few concepts. A concept can be anything like place value in decimals or carry forward addition, and there are likely to be no more than a few such ladder concepts in each grade. Children generally make a few standard mistakes in each concept. The challenge for a teacher is to identify the handful of commonest mistakes made in a subject by children in each grade and then teach them in the most effective manner.

In the circumstances, a repository of all such ladder concepts for each grade and their respective common mistakes, with the most powerful teaching methodologies and digital content assume significance. If this can be delivered in an easily accessible (say, on mobile phones) and cognitively striking manner as byte-sized packets (2-3 minute interactive graphic videos) to instructors, it can become powerful instruments to help effectively explain difficult concepts to children.

There are a number of technology entrepreneurs who claim to have apps which can deliver such content. I am not sure whether they have got it right or can get it right so easily. For a start, even identifying the concepts and the commonest mistakes requires access to massive volumes of data. Then there is the issue of developing the most effective teaching methodologies that incorporates learnings from the pathway of each mistake. This content then has to be rendered in a cognitively striking manner. Finally, the content should be delivered in a manner that is easy for teachers to access and encourages them to use.

Not that easy for technology entrepreneurs, howsoever smart, to develop for a few million in a few months. If some of them are still attracting interest, it is only because the market is so large and broad, and largely un-served, that content with even limited value addition will attract significant interest. 

3. Public school systems collect massive volumes of data about various school level activities, including on physical infrastructure and human resources as well as on transactions like student and teacher attendance and utilization of allocation funds. Unfortunately, in the absence of any work-flow application, this data is rarely used as decision-support on either regular monitoring or policy design. I have blogged earlier about the challenges with developing IT applications in education, health, and other sectors.

Given that the monitoring hygiene factors are largely identical across school systems, apart from being powerful force multipliers in improving service delivery, IT applications that incorporates these activities can break open a very large market. But it will have to emerge through a patient iterative process that marries both professional expertise and programming skills with strongly engaged public stakeholders. 

Nudging on Donations

Mostly Economics points to the new working paper by Dean Karlan and John List that suggests an innovative way for charities to signal their credibility nudge donors into increasing their donations. Karlan and List write,

We develop a simple theory which formally describes how charities can resolve the information asymmetry problems faced by small donors by working with large donors to generate quality signals. To test the model, we conducted two large-scale natural field experiments. In the first experiment, a charity focusing on poverty reduction solicited donations from prior donors and either announced a matching grant from the Bill and Melinda Gates Foundation, or made no mention of a match. In the second field experiment, the same charity sent direct mail solicitations to individuals who had not previously donated to the charity, and tested whether naming the Bill and Melinda Gates Foundation as the matching donor was more effective than not identifying the name of the matching donor. The first experiment demonstrates that the matching grant condition generates more and larger donations relative to no match. The second experiment shows that providing a credible quality signal by identifying the matching donor generates even more and larger donations than not naming the matching donor. Importantly, the treatment effects persist long after the matching period, and the quality signal is quite heterogeneous - the Gates’ effect is much larger for prospective donors who had a record of giving to 'poverty-oriented' charities. These two pieces of evidence support our model of quality signals as a key mechanism through which matching gifts inspire donors to give.

In this context, I have blogged earlier about studies by the same duo and others about how matching contributions and its magnitude can provide signals that can increase the amounts of donations made by prospective donors. Quality signals are powerful mechanisms to "crowd-in" funds from donors.

But there is nothing surprising about this finding since this underlying premise underpins much of modern financial markets. If Warren Buffet invests in a particular stock or fund, the chances are that it will attract a herd of investors! In fact, hedge funds raise private capital by playing up the credibility of their prior investors and using that to encourage prospective investors. Start-up firms which have atleast one big angel investor will find it much easier to raise additional capital.

This also has important longer-term lessons for the aid and philanthropy businesses. The powerful impact of credible lead donors, like Bill and Melinda Gates, should be leveraged to multiply the amounts of money that can be raised. For example, the Gates Foundation could work with a series of smaller non-government organizations (NGOs) within sectors where the Foundation is already active, provide small seed capital, and then encourage those NGOs to leverage it to solicit additional funds from other donors. I am sure this model is already being used by the larger foundations and their donees, though the share of their funds routed through such partnerships may be small.  

In fact, this is what multilateral agencies like the World Bank and the UNICEF have been doing for years. They provide the first tranche or seed funding for new initiatives and projects,, which is then leveraged to raise additional capital, both from private sector and other non-government agencies. The presence of the Bank or UNICEF provides the necessary reassurance to these lenders and donors that necessary due diligence has been done and the project is worthy of support and their investments and donations are less likely to go down the drain.

Therefore, is it time that the larger and more reputed private donor agencies leverage their brand name and reputational value to help smaller organizations raise more capital and thereby multiply the amount of money that can be mobilized to serve the same causes espoused by the larger donor?

On rights-based development and populist quick-fixes

Pranab Bardhan has a brilliant essay in Boston Review that strikes an immediate chord with development discourse in India. Instead of commenting, let me reproduce portions.

He appreciates the concern among civil society groups and activists at the extreme poverty and vulnerability of the marginalized and their enthusiasm for a rights-based approach (as against the dole-based approach of traditional welfare state). However, he cautions against the prevailing craze for it,

"It (rights-based approach) serves to raise consciousness among the poor and the vulnerable about their entitlements, and remind them that they are not mere supplicants to politicians and bureaucrats. In a weak administrative and institutional context, however, the NGO approach of uncompromising support for citizen’s rights can cause more harm than good. If the structure for implementing some of these rights is weak and corrupt, then the rights are hollow and promoting them breeds cynicism."

In the context of India where courts have joined civil society groups in taking up the cause of the poor and vulnerable, he strikes a much-needed but politically incorrect note of caution,

"India is already littered with hundreds of unenforced or spasmodically enforced court injunctions, some of them on the implementation of rights. This proliferating judicial activism, egged on by the rights-based movement and the media, may end up, for all its good intentions, undermining the credibility and legitimacy of the judiciary itself."

Prof Bardhan hits the nail on its head when identifying the real limitation of civil-society activism driven rights-based approach to development in societies where the ability of governments to deliver is severely constrained. He writes,

"The social activists share with left-wing unions a preoccupation with redistribution, and a lack of concern for generating enough surplus to enable it. There are obvious trade-offs here between incentives for private enterprise and the need for social justice... When real capacity to create wealth is missing, social activism is often reduced to mere populism, which in the long run can be wasteful and counterproductive."

This is the biggest problem with the dominant development policy discourse in India - too much of wealth re-distribution and too little of wealth creation!

Again, in light of the political drama surrounding anti-corruption activists and their populist quick-fixes, Prof Bardhan questions their right to appropriate the mantle of popular legitimacy in democratic societies,

"In the policy arena... such non-party organizations cannot and should not threaten to replace the role of traditional party organizations in a democracy. Voluntary groups, as single-interest advocacy lobbies, lack the mechanism of transactional negotiations and give-and-take among diverse interest groups that large party organizations, representing and encompassing those varied interests, possess.

This kind of give-and-take is particularly important when resolving controversial issues and requires complex trade-offs and balancing of diverse interests. Those who speak for the poor usually underplay the diversity among the poor and sometimes romanticize their traditional way of life. A dam may benefit thousands of small farmers in hitherto parched land, even as it displaces thousands of others; a development project may displace some from their ancestral land but provide jobs and more productive livelihoods for others; and so on. Each such case involves complex trade-offs and demands negotiated compromises and compensations across groups and over time. Such deliberations should take place within a party forum where diverse interests and stakeholders are represented."

Finally, this message for those opposing capitalism on the grounds that capitalist exploits the poor, is extremely relevant,

"Activists who romanticize the pristine life of the poor and the indigenous, and ignore a great deal of misery and stagnation, should keep in mind that the horrors of capitalism fade in comparison with the horrors of pre-capitalism."

Social enterprises in development

Here is my op-ed in today's Mint on social enterprises.

Crowd-sourcing on development problems?

In this age of crowd-sourcing, it is indeed surprising that development policy making has not attracted the attention of the global commons. Surely addressing development problems like, say, preparation of Detailed Project Reports (DPRs) and Master Plans, is both more important and more challenging and more satisfying than solving mathematical puzzles!

Is it a case of questions not being appropriately formulated and raised in the most inclusive forums? In other words, a classic case of supply and demand not matching due to the considerable search and co-ordination costs faced by all sides.

There is no shortage of development problems, both specific (to an area or sector) and generic. There are also the expanding numbers of non-profit organizations and even individuals (who see it as a hobby) in search of such problems and with a deep urge to explore solutions to them. Further, the internet (and the different media of communication that utilize it) offers an excellent platform that can facilitate the matching of supply and demand. In fact, even the most daunting of development problems, if appropriately packaged, can potentially attract the sharpest of minds to work on it. And all that for free!

Here is one example of how this supply-demand matching can be achieved. Consider the challenge faced by a backward state (or even a district) that wants to develop a perspective plan for developing a connecting road network with the resources that would be available under the Prime Minister's Grameen Sadak Yojana (PMGSY) for the next three years. The task here is to choose from among the multiplicity of possible road network routes, so as to optimize on overall development outcomes.

The objective of any newly formed road network would be to maximize linkages with population centers and areas which are both established or also have potential for new industrial and other economic activity. In other words, the aims is to identify road alignments, the completion of which generates the greatest net economic return.

The single biggest constraint faced by the road planner is scarcity of resources, given the numerous competing and similarly important claims. Other constraints include land acquisition costs, availability of vacant government lands (for laying roads) etc. The most optimal road network route is also a function of variables like coverage of the largest numbers of population centers, potential industrial (or resource rich areas) areas, and linkages with institutions like tertiary hospitals, colleges/universities, government offices and so on.

In many respects, stripped off all its contextual needs, this is remarkably similar to standard optimization problems with certain pre-defined constraints and variables. And given the complexity of these socio-economic contexts - they can be among the most challenging of such problems - it is only natural that they become irresistible attractions for the breed of mathematicians for whom solving such problems is a hobby.

I agree that it would be impossible to accurately capture all the intangible development imperatives and related variables in any such quantitative model. But then, they form a surely better standard (than prevailing ones) for evaluating from among competing alternative routes. In fact, there is a much greater likelihood of a more socio-politically efficient outcome, if these choices (and not those picked randomly without any objective basis) are then subjected to the ultimate political test before the final choice is exercised.

The aforementioned is only an illustrative example. There are numerous other issues and problems facing development administrators at the cutting edge, which can be more efficiently addressed by a crowd-sourced approach. They range from the simplest like financial, material, and manpower requirements to awareness creation (say development of posters and other campaign material) on public issues, help in introducing new technology interventions, partnership on implementation of specific solutions to development problems, and so on.

In the circumstances, for those non-profit organizations searching for an idea to fund, how about development of a portal that provides a platform for matching sellers (say, government organizations and officials) of development problems and buyers (geeks and experts and non-profit organizations) with an interest/hobby in solving them?

IPO with a difference

Early this week, Do Something, a non-profit organization promoting volunteerism among teenagers in the US, launched an IPO to raise $8 million to double its activities by 2011. Unlike the typical IPO prospectus, this one does not pledge to make any profits, and claims that the "units offered in conjunction with this prospectus represent a perpetual interest in Do Something; this interest is strictly philanthropic, with no provision for cash returns at any time."

Do Something promises "a significant social return on investment", quarterly performance updates and a conference call with management. But none of these recent philanthropic IPOs actually gives investors voting rights, essential to ensuring management accountability and removing managers who fail to deliver on their promises. But this is surely something for atleast a few NGOs in India to imitate.

HT: Economist

Matching beneficiaries with benefits

Some time back, I had written a Mint op-ed about how the NGO world could benefit from the services of institutions like credit rating agencies, which can help funnel the massive amounts of philanthropic contributions, especially from the smaller contributors, to the most deserving causes. As a corollary to this, it is another major challenge to match deserving beneficiaries to the available philanthropic assistance.

Now Georgia Levenson Keohane, draws attention through a Slate column, about the role of SingleStop USA, a poverty fighting startup, which seeks to "connect the working poor in New York with government funds and services intended for them". After connecting beneficiaries to specific eligible assitance, SingleStop also helps them through the entire application process, helps them obtain the benefits and even give guidance on how to optimally use the assitance.

It has been estimated that nationally more than $65 bn in social welfare assistance goes unclaimed for, that 25 percent of the working poor receive no benefits at all, despite their eligibility, and that only 7 percent of these families access all four of the major supports (tax credits, Medicaid, food stamps, and child care subsidies). It gets support from philanthropists and some well known foundations.

Keohane describes SingleStop's operating model thus, "With a Turbo Tax-like software and legal and financial counseling, it helps people tap into public benefits (tax credits, food stamps, child care subsidies, and health insurance) that they're eligible for but aren't using." After matching them with the eligible assistance, SingleStop also after clients determine what they're eligible for, counselors walk them through the application process, help obtain the benefits, and then provide specific guidance about them.

Keohane goes on, "In 15 minutes, the organization's software tools calculate a family's eligibility for a host of benefits—public assistance (TANF and other welfare-to-work initiatives), food stamps, Medicaid, housing and child care subsidies, health care, school lunch programs, heating assistance, Social Security disability, and tax credits. SingleStop counselors then provide families with tailored legal and financial advice—how to stave off eviction with new rent money or vouchers, how to consolidate debt and begin to pay it off, how to open a savings or IDA account."

Since 2001, a New York City pilot version of the program has connected 70,000 low-income residents to hundreds of millions of government dollars. According to a McKinsey & Co. study of the New York pilot, the average family in a SingleStop program recouped $1,800 in tax credits and $5,000 in benefits that they weren't previously receiving.

It is no different in India where the large numbers of State and Central Government welfare programs - especially in health care, education, skill development, and rural credit - are inaccessible to the most deserving, both due to lack of awareness and also the complexity involved in the application procedure. The SingleStop model is an excellent example of how the huge challenge of rectifying the gaps and inefficiencies in the welfare assitance delivery channels can be addressed. It can be emulated to match beneficiaries with both Government welfare and philanthropic assistance.

Role of NGOs in the development process

It has been some time since the Non Government Organizations (NGOs) have joined the public and private sectors as partners in the development process. More than a million NGOs operate in India, covering all the development sectors. But unfortunately, their impact, measured in terms of final outcomes, have been marginal and disproportionately lower than expectations. Only a handful of NGOs, and that too in a few sectors, have made an impact and significantly influenced the course of development process.

Unlike a few years back, when there was an acute scarcity of development funds, today we have an abundance of resources. But the problem remains one of spending the available resources, and spending them effectively and within the designated time. Getting the biggest bang for the development buck is the challenge! This is where Government institutions and systems fail miserably, and where the non-profit sector is uniquely positioned to assist.

The reasons for the government failings are numerous and is not the concern of this post. I will try to identify a few ways in which NGOs can increase their influence on the development process. So here is a laundry list of prescriptions for how NGOs can improve their performance. (some of them are inter-related)

1. Too many NGOs, especially the smaller ones, are involved in themselves running small schools, clinics, anganwadi centers, watershed projects, Self Help Groups (SHGs), child labour schools etc. Many of these NGOs are in turn funded by large aid agencies and foundations. While most of these institutions are undoubtedly run well, they are a small drop in the vast ocean of such activities. It is common place to find 20 to 30 good primary (even secondary and high) schools run by NGOs in each district, as against a few thousands of Government run schools.

In most of these cases, they are well run because of the immense personal effort and attention put in by a few dedicated individuals, and not the result of any radical systemic or institutional innovation. Given all the aforementioned are scarce commodities, it therefore becomes difficult to replicate and scale up. In fact, it would be more appropriate and efficient if these valuable human personnel are utilized on a larger canvas, rather than being confined to a few schools. In other words, we have an inefficient utilization of scarce, committed human resources.

Apart from being examples of well run development institutions, they have limited utility. Of course there are significant learnings from these examples, and many Government programs and policies have indeed drawn important lessons from them. But such examples are too many in number to draw any more meaningful inferences, but are too small to make any significant dent on the problem at a macro level.

2. NGOs need to complement and supplement the efforts of the Government in all their activities. But too many NGOs start running operations parallel to the Government and in competition with it, most often even without the knowledge of the local district administration. The perception that Government machinery is corrupt and inefficient may be the predominant reason for NGOs hesitating to associate with the local administration. But this fails to acknowledge the reality that there are severe limitations to their independent role, and the reality of Government role cannot be wished away.

NGOs need to be partners in assisting the local administration in achieving development goals. Instead of remaining stuck with pilots and small demonstration examples, NGOs need to be actively involved in the implementation of on going Government welfare programs. The local administration can leverage the strengths of these NGOs in effectively implementing major programs like the SSA, NREG, SHGs etc.

3. NGOs are more likely to have the expertise and knowledge to conceptualize school curriculums; affordable and appropriate construction designs for housing; rural transport systems; low-cost irrigation structures; identifying and adopting indigenous technologies after appropriate modifications and so on. NGOs can become an invaluable location for Government departments and agencies to source such expertise. NGOs can specialize in a specific sector, and become best practices resource banks for that sector. Such best practices need not be confined to technologies or materials, and should involve processes and work practices.

4. One of the biggest problems facing our field level development administration is the virtual absence of any comprehensive program for training functionaries working at the cutting edge. NGOs can play a vital role in preparing training material. They can also directly assist in the training of teachers, ANMs, community health workers, anganwadi workers, agriculture assistants, veternary assistants, community activists helping SHGs etc.

If one major NGO or corporate group can fully adopt the training requirements of primary school teachers in a district (say), that can make more meaningful difference than running a hundred schools. And all this will cost much less.

5. Government agencies are severely handicapped by the absence of adequate systematic process support. This deficiency manifests in the poor progress and quality of implementation of works and programs. NGOs and corporate groups can give a qualitative filip to the implementation of Government programs by helping put in place independent third party quality controls, independent program monitoring systems (software etc), carrying out impact evaluation studies.

Therefore it would be invaluable if NGOs assist local administration in such process support for programs like NREGS, SSA, PMGSY, NRHM/NUHM, welfare pensions and the numerous state government welfare programs.

6. NGOs and corporate groups can help Government agencies implement internal process improvements. For example, Urban Local Bodies (ULBs) in India are grossly inefficient and do not have any established and standardized accounting systems. NGOs and corporate groups can assist in the development and implementation of financial accounting softwares for double-entry accounting or revenue collection in ULBs.

In fact, this is an ideal example of how corporate welfare and development objectives can be reconciled. While the corporate group can make its money out of selling such software, albeit at a lower profit, the ULBs benefit by way of having access to a single stop software solution to their problems. Similar internal software support useful for Government offices include work-flow automation, file management systems, bill management/tracking systems, citizen grievance redressal softwares etc. While there have been too many local experiments in such systems, most of them have been unprofessional and have suffered from lack of standardization. Such software support increases the efficiency of government services and helps in containing corruption.

7. Another area where NGOs can be of great value is in helping adopt low cost solutions and technologies to many development problems. In recent years, construction technolgies and processes have undergone a massive revolution and we are constructing hundred storey buildings and grand civil engineering marvels. But on the other side, we are yet to have reliable, low-cost, pre-cast housing technolgies or models that can be replicated in a mass scale.

The Government of Andhra Pradesh is building 2.5 million houses for rural poor in three years and the Government of India is proposing to build another 10 million housing units to providing housing for poor. These are massively ambitious construction challenges and cannot be implemented along the conventional lines, and will require substantial pre-cast inputs so as to ensure their completion in time and with good quality.

Low cost irrigation solutions, electrification of remote and interior villages are examples of areas where non-profit sector can contribute in making a meaningful difference.

8. One of the most fertile areas for non-profit sector intervention is in awareness creation or Information Edication Campaigns (IEC). It has been well documented through numerous studies that one of the most important reasons for the poor implementation of various government programs is lack of adequate awareness among the stakeholders. Development also involves bringing about changes in the attitudes behaviour and perceptions of the stakeholders on many social issues.

Regular government programs and agencies do not attach much importance to this critical dimension, that is vital towards sustaining the change. Non-profit sector and NGOs have greater expertise in conceptualizing, preparing campaign materials and even running such IECs. In fact, effectively communicating social and other public interest messages would require borrowing techniques and processes from corporate communication strategies. Further, professsional communication strategies are important for effectively communicating critical reform issues to stakeholders.

9. Finally, Public Private Partnerships (PPP) are a more sustainable and mutually beneficial strategy for NGOs and private charitable foundations to become involved as active partners in the development process. There is enormous potential for mutually beneficial PPPs in agriculture (extension services, storage, and marketing facilities), micro-finance, vocational skill trainings, health care, education, sanitation and public health etc.

The PPPs, when suffused with a reasonable public service dimension, can deliver basic services of good quality at affordable cost to the poor. It is surely the way of the future and is also the most effective way to bring in the private sector into being active partners in the development process.

Role of for-profit MFIs

The Mexican microfinance bank Compartamos, run by Carlos Danel and Carlos Labarthe, has emerged as one of Mexicos's most profitable banks. It has even gone public and, in the one year since, given a return on equity in excess of 40%. It is estimated that 23.6 percent of Compartamos’s interest income went to profits. But its success has generated an interesting debate about how microfinance institutions (MFIs) should be run and what should be their objectives.

Compartamos went commercial in 2000 from being a non profit institution. Last April, Compartamos’ owners sold 30 percent of their stock on the Mexican stock market in an initial public offering, which brought in $458 million. Compartamos grew to 840,000customers last year, from 60,000 in 2000. The success of Comparatamos and other commercial microfinance banks have set off a scramble to get into this market. Major Wall Street Banks like the Citigroup have recently sprouted their own microfinance arms. These commercial banks have been attracted by the high, 25% to 45% range of interest rates charged for microloans in much of the world.

Mr. Danel and Mr. Labarthe say microfinance will help more poor people by tapping the boundless pool of investor capital rather than the limited pool of donor money. But others disagree and say that such microfinance banks that focus on the investors and their returns, instead of the borrowers, end up defeating the very purpose of micro loans.

This debate about the role of MFIs is beside the point. Deutsche Bank estimates the global demand for microfinance loans at about $250 billion, 10 times the amount that has been lent. This huge demand cannot be met from donor assistance alone, and will have to tap into the general investor pool. Therefore banks like Compartamos have an important role to play in complementing the efforts of donor financed MFIs like the Grameen Bank.

It would have been fine if non-profit MFIs were ready to step in and replace for-profit microfinance banks like Compartamos. But given the huge gap between the demand for microloans and the available pool of non-profit microloans, any effort to ban institutions like Compartamos will only hurt the poor. The world of microloans is large enough to accomodate both non-profit and commercial MFIs, and still leave enough space for others too. And in any case, the progression from the moneylender culture with all its attendant and well documented problems to organized microloans is itself a welcome development.

Update 1 (14/4/2010)
Times captures this debate on the pros and cons of for-profit MFIs who charge large interest rates and use the MFI cover to penetrate the market at the bottom of the pyramid.

Lessons from Microfinance

Microfinance is increasingly accquiring a sacrosanct status in our anti-poverty programs. Whole poverty eradication programs are being tailored around the concept of micro-loans. It is seen as the biggest idea in poverty eradication for a long time, and is seen as the "Holy Grail" to wiping out poverty from the face of earth. Developing country governments believe that microloans will unleash billions of small entrepreneurs, whose small businesses will put an end to poverty. Spurred on by all this euphoria, the United Nations declared 2005 the “International Year of Microcredit” and in 2006 the Nobel Peace Prize was awarded to the doyen of micro-credit Mohammed Yunus.

Micro loans are generally smaller amounts and given at higher interest rates. Their repayment periods are also shorter. They are different from normal formal institutional credit, in so far as they are given without insisting on any collateral. In the context of India, most of the microfinance loans are given to Self Help Groups (SHGs), as the peer pressure of a group has been found to ensure regular repayment. These SHGs typically consist of 10-12 members, mostly women. Apart from ensuring access to credit, microcredit borrowers gain valuable experience in working within a formal institution, learning what to expect from lenders and fellow borrowers, and what is expected of themselves. This experience will be a help should they ever graduate to commercial credit or have other dealings with the formal financial world.

Surprisingly for such an important policy choice, and that too on a complex and multi-dimensional issue like poverty eradication, there has been limited empirical analysis of the impact of the micro finance movement. Google searches could not locate even a single rigorous and detailed study of the impact of micro finance activities on poverty eradication in pioneering states in India like Andhra Pradesh and Kerala.

The impact of micro finance loans need to be analyzed in the light of the experience of the past decade, and policies formulated based on this. What long term impact has microfinance had on SHGs who have been involved with thrift and microfinance activities for a long time? How have the incomes of SHGs increased after first, second, third, and further linkages with microfinance loans? What are the major uses to which microfinance loans have been put to? Have micro finance loans been instrumental in lifting families into a higher trajectory of livelihood or economic growth? Have these loans been instrumental in spawning small businesses in villages? What have been the economic multiplier of these micro loans? Is it the solution to poverty in the developing world, or something more modest— a way to empower the poor, particularly poor women, with some control over their lives and their assets? Finally, what role does micro credit have in our poverty eradication master plan?

James Suroweicki writes that micro finance loans are mostly used to “smooth consumption”—tiding a borrower over in times of crisis, or used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees. This is partially because such loans are usually very small and and generally come with very high interest rates, but also because the vast majority of microbusinesses have only one paid employee: the owner. He invokes the economist Jonathan Morduch who says that microfinance “rarely generates new jobs for others”, and argues that microfinance is therefore unsuitable to sustaining and creating entrepreneurship, which is vital to making a serious dent on poverty.

He claims that poor countries need not more microbusinesses, but "more small-to-medium-sized enterprises, the kind that are bigger than a fruit stand but smaller than a Fortune 1000 corporation." He writes about the problems facing these medium sized companies, "In high-income countries, these companies create more than sixty per cent of all jobs, but in the developing world they’re relatively rare, thanks to a lack of institutions able to provide them with the capital they need. It’s easy for really big companies in poor countries to tap the markets for funding, and now, because of microfinance, it’s possible for really small enterprises to get money, too. But the companies in between find it hard. It’s a phenomenon that has been dubbed the “missing middle.”"

The problem in the developing countries is a dearth not just of lenders but also of people willing to buy an ownership stake in companies, like the angel investors and venture capitalists that American entrepreneurs often rely on. Bank loans are not adequate and flexible enough for these middle companies to survive. As Suroweicki says, "Supplying the missing middle will require backers who want to invest in companies rather than just lend to them. "

But there have been encouraging developments as the microfinance movement continues to evolve. With microfinance loans increasingly taking the centre stage of poverty eradication efforts, banks and post offices have entered micro-finance lending in a big way. They lend micro loans to SHGs at slightly less than the regular bank rates. In fact, all the scheduled banks (the nationalized banks) in India have been given annual targets to provide micro loans to groups as part of their priority sector lending. States like Andhra Pradesh have gone one step further and give interest subsidy to SHGs that have been regular in repayment for a minimum period of six months. According to the present rules, SHGs can get upto Rs 1,50,000 for their first linkage with the bank, upto Rs 3,00,000 for their second linkage, and upto Rs 5,00,000 for their third linkage. (Rs 40 = $1)

Attracted by the large interest rates, many private Microfinance Institutions (MFIs) too have entered the sector. They lend at between 20-40% rates, which offers them significant profit opportunities. Unfortunately, the absence of proper regulation has left the door open for the emergence of a number of unhealthy lending and recovery practices, which have brought considerable bad name to the sector. The Government have in turn responded with regulatory proposals, some of which threatens to strangle private participation in the sector. These include capping micro-finance interest rates at lower rates, which would distort incentives and inhibit the market.

Tyler Cowen and Karol Boudreaux, while acknowledging the undoubted benefits of micro-credit, puts its impact in perspective thus, "microcredit may help some people, perhaps earning $2 a day, to earn something like $2.50 a day. That may not sound dramatic, but when you are earning $2 a day it is a big step forward... The improvements may not show up as an explicit return on investment, but the benefits are very real. If a poor family is able to keep a child in school, send someone to a clinic, or build up more secure savings, its well- being improves, if only marginally."

It is undeniable that microfinance has had a deep impact on poverty alleviation, in terms of institutionalizing access to formal credit markets and helping people escape the clutches of exploitative money lenders. It has helped "smooth over" consumption and provided timely and adequate money for poor families to meet their important and immediate needs like health and education, besides providing a significant part of the working capital requirement for many self-employed families. Micro finance has therefore clearly helped in making incremental advances in the fight against poverty.

Apart from its immediate benefits, it has also brought millions of women into the orbit of the formal credit delivery mechanism. Its most lasting impact has arguably been in the massive force of social empowerment it has unleashed among the women members of the SHGs. As a poverty alleviation strategy, it has been a remarkable and undoubted success. But as a poverty eradication strategy - the jury is still out.

Rating NGOs

India is home to some of the largest number of NGOs working in social and other charitable causes. It is estimated that there are between 1 to 2 million NGOs operating in diverse fields like education, health, housing, micro-finance, disabled and old aged welfare, agriculture, environment, disaster reilef etc. Most of them are involved in the development arena and are active participants in poverty mitigation and eradication efforts. Though the majority of NGOs are funded by private capital, a significant number of them receive some form of government grants. Except for a few large ones, the overwhelming majority of NGOs are small.

Despite the large number of NGOs working in every sector, there is very little information about the effectiveness of these organizations in achieving their goals. Numerous studies have shown, and I have seen a number of them, that NGOs are not immune from the usual malaise that afflicts government agencies. Further, given their small size and limited reach, NGOs are most effective when they are able to establish successful demonstration examples for effective delivery of a welfare service or a development activity or indulge in awareness creation and capacity building activities. Such experiments senitize local citizens, build awareness and develop demand side pressures, and help Government agencies identify the weaknesses in their delivery channels and systems. Instead we find numerous examples of NGOs trying to replicate the role of Government and compete with Government in delivering development related services and activities, thereby failing to achieve their desired objectives.

It is therefore important that we develop mechanisms to judge the performace of NGOs against their stated objectives. How effective are they? Have their actions had the desired demonstration effect? How scalable are their activities? Have their activities increased the awareness among the target group? What has been the impact of its performance on the effectiveness of Government? How have the outcomes improved in the area and the sector, since the NGO started activities? How much value for money do the NGOs activities deliver? How do charities compare in their spending on administration?

If we have credible enough rating of the performance of NGOs in each area and sector, we could indeed have a market in raising donations for charitable causes. Wealthy and willing donors would not need to scout around before donating their money. In fact, they can choose the location and activity of their choice and be rest assured that their contributions are well spent.

It will also go a long way in generating healthy competition between NGOs and improving the performance of many inefficient NGOs. Such competition will improve the economic efficiency of NGOs and ensure that they spend more of their resources on addressing their main objectives than on administration. The ineffective and inefficient ones will not be able to attract funds and will slowly leave the field, while the effective and well run NGOs will be able to attract more funding and expand their activities. Governments will also find it easier to channel scarce Government grants to the well functioning NGOs. A rating agency will be the first step, but probably the most improtant one, in ensuring proper regulation of the NGO sector.

The NYT carries a story of hedge-fund analysts, Holden Karnofsky and Elie Hassenfeld, who have floated the world's first charities rating agency. GiveWell, with only these two employees, studies charities in particular fields and ranks them on their effectiveness. It is in turn supported by a charity they created, the Clear Fund, which makes grants to charities they recommend in their research.

Do not be surprised if we have in the near future, income tax deductible charity funds, floated by organizations like Clear Fund, with the specific objective of raising philanthropic contributions for a specific cause or a bouquet of charitable causes. How about a Primary Education Fund, floated by Education Foundation, aimed at soliciting philanthropic contributions from those interested in helping improve primary education!

Update 1
Peter Singer has this in the Project Syndicate about the difficulty in evaluating charities, "Evaluating charities can be more difficult than making investment decisions. Investors are interested in financial returns, so there is no problem about measuring distinct values – in the end it all comes down to money. It is more difficult to compare the reduction of suffering brought about by correcting a facial deformity with saving a life. There is no single unit of value. "

With about $200bn given away to charities by individual donors, the importance of rating charities is bound to increase.

Update 2
How about rating micro-finance institutions? Especially since Daniel Akst feels that the best way to donate $1 is to give to micro-finance institutions.