Tuesday, September 29, 2009

Is the recession transforming philanthropy?

Yesterday evening, the editor of the Chronicle of Philanthropy, Stacy Palmer, was interviewed briefly on NPR regarding the recession’s impact on giving. While the outlook is fairly grim even for last year when charitable donations decreased, Ms. Palmer did note that the recession is forcing donors to be pickier with their donations. Donors are starting to increase their focus on outcomes when choosing where to give.

Could the financial squeeze of the recession create a new paradigm in giving?
Philanthrocapitalism has been a hot topic after the publication of Matthew Bishop’s and Michael Green’s book by the same title. Venture philanthropists such as Bill Gates have called for philanthropy to become more like for-profit capital markets that yield results on investment. Whether the market model actually works for philanthropy is still a question under debate. Many claim that people give with their hearts not with their minds, and so the need to see impact and a return on giving is less of a worry for a philanthropist as opposed to an investor. Yet during this recession, the reoccurring theme shows that the decline in giving is accompanied by a reassessment of giving, with an increased focus on impact donations. Will the recession transform all philanthropists to philanthrocapitalists on a smaller scale?

While the long-tern impacts of the recession are still to be determined, it will be interesting to see whether certain types of giving will be more dependent on the economic situation compared to others.
Recent research shows that tax policy has different impacts on charity and non-profit donations depending on the type of work the organizations do. Specifically, donations to charities that appeal to higher human needs such as the arts, or environmental causes tend to have high tax-price elasticity, meaning that tax incentives increase the donations to these charities. While organizations that cater to basic human needs such as hunger and poverty relief tend to be inelastic to tax incentives. This implies that people still give with their heart, but only to selective causes. Perhaps a similar elasticity trend will surface between the nation’s economic condition and giving, where donations to basic need organization will remain relatively stable, while donations to organizations that provide higher needs will become outcome-driven.

-Yulya Spantchak
Research Associate
Center of Global Prosperity

Tuesday, September 22, 2009

GDP is a Measurement of Apples to Bricks

Last week FT.com commented on Joseph Stiglitz’s denouncement of GDP as an indicator of economic progress and prosperity. Of the economic sectors, this is most evident in global health, in which the U.S. expends 16% of GNP while France only spends 11% on health.

As long as GDP remains the sum total of all goods and services in any one sector, what is counted in the U.S. is quite different than in France. For instance, the U.S. counts the costs of mal-practice insurance and awards to plaintiffs; depreciation on plant and equipment on accelerated 5-year schedules; R&D in its pharmaceutical and vaccine industries; and the clinical expenditures of incoming French citizens to American specialty centers, as well as hundreds of thousands of other foreign citizens.

France subsidizes the R&D components of its pharmaceutical sector. Moreover, France regulates drug prices at launch and subsequent rates of increase. U.S. pharmaceutical companies must accept the mandated prices or risk losing market share. To compensate, they sell the same products at higher prices to U.S. citizens, thus subsidizing French patients.

Professor Stiglitz is correct: what we measure affects what we do. GDP is a determinant of foreign aid resource flows to poor countries. The "cult of figures" rewards those with low GDPs. However, these figures only include economic output in their formal sectors, leaving out the greater levels in their informal sectors.

As Einstein once famously said: all that counts isn't counted and all that is counted doesn't count.

-Jeremiah Norris
Senior Fellow
Center for Science in Public Policy

Tuesday, September 15, 2009

Microcredit – not a silver bullet, but still a tool.

Microcredit, or small loans to poor people, was made most famous by Mohammad Yunus who founded Grameen Bank in Bangladesh in 1983 and made group lending and village banking household terms in international development. The field grew to microfinance, which applies to not only loans, but a wider set of financial products including microinsurance and savings products. For decades now, microfinance was seen as a silver bullet in fighting poverty, improving gender equality, and even decreasing children’s school drop out rate. The field grew from a few established organizations such as Grameen Bank, FINCA International, ACCION, and Opportunity International, to numerous organizations both international and local providing similar services to low-income populations globally. Microfinance received accolades from nearly everybody: international organizations, development workers, governments, and academics. With only occasional critiques regarding the high interest rates, the field grew exponentially. Yet, only recently have the true effects of microfinance been tested.

Thus far two randomized studies critically examined the impact of microfinance on poverty alleviation:
The miracle of microfinance? Evidence from a randomized evaluation by MIT’s Poverty Lab
Expanding Microenterprise Credit Access: Using Randomized Supply Decisions to estimate the Impacts in Manila by Dean Karlan and Jonathan Zinman at Yale and Dartmouth.

The overall results were disappointing at best. Bloggers actively discussed the results, and microfinance quickly fell off the pedestal it sat upon for decades. Essentially, neither study found microcredit (the papers looked at microcredit specifically, not a broad range of financial services) to be all that effective in poverty alleviation, improving health, promoting gender equality or increasing access to education. However, these are not the ultimate findings, and as in all academic papers, it is worthwhile to delve into the details.

The first study showed that households that received loans increased their expenditure on durable goods, and decreased their expenditure on “temptation goods” such as alcohol or tobacco. The increase spending on durable goods was especially seen in households that already owned a business, or were likely to start a business. Households without a business did not increase spending on durable goods after receiving the loan. Likewise, households with the highest propensity to start a business or ones that already own businesses decreased their spending on temptation goods, while households without businesses increased their temptation spending. The claims that microfinance increases access to education, changes gender roles, and improves health were not supported by these findings.

The second study’s results by Dean Karlan and Jonathan Zinman indicate that microcredit is not an effective tool in helping the poorest of the poor escape poverty. Microcredit did increase overall borrowing of the household. However, the households that borrowed from the microfinance institution were more likely to borrow from the formal sector. The return on business profit was larger for the higher income borrowers than lower, and it was much higher for male borrowers than female. Because microfinance traditionally targets women, these results are not only surprising, but should be considered by MFIs in their lending schemes. The results of this paper included findings which were contradictory to the Poverty Lab’s paper. Karlan’s paper found an increase in school enrollment within the household, especially the households where the male received the loan, while the Poverty Lab’s study found no such effect on education. Also, Karlan’s paper found no observable changes in consumption patters, and no impact on capital inputs into the business, while the main finding of the Poverty Lab’s research was an increase in durable good expenditures. As with the first study, no positive changes in health were observed.

At the end of the day, both studies produced mixed results and neither of these studies discredited microcredit entirely. Intuitively, loans should not be distributed randomly, but to groups or individuals who have the greatest chance of repayment. Thus providing loans to individuals who have an entrepreneurial drive and who already own a business makes logical sense. Whether those individuals are considered the poorest of the poor is a different manner. Microcredit is not a silver bullet, nor should it be. However, based on the Poverty Lab’s analysis it does promote durable good expenditure and allows people to invest in their businesses leading to a healthier economy overall. Microcredit seems to be the most helpful to individuals who have an entrepreneurial personality, and that is not an all inclusive category. Its main role is to give credit where there was none to people who have the drive and ability to use it. So no, microcredit is not a silver bullet, but nevertheless it remains a useful tool in international development.

-Yulya Spantchak
Research Associate
Center for Global Prosperity

Tuesday, September 8, 2009

Trends in Religious Giving

The 2009 Index on Global Philanthropy and Remittances reported that US congregations gave $8.6B to relief and development in developing countries in 2007, making religious organizations the second largest private contributor to causes in the developing world.

Research from the Center on Philanthropy at Indiana University made available through the
Giving USA Foundation indicates that recessions historically have not had much effect on religious giving. Religious congregations remain the largest destination for American’s generosity even during economic slowdowns, and when adjusted for inflation during recessions, religious giving decreases -0.1% compared to an average 2.8% growth in non-recession years.

While giving levels within religious communities are likely to remain relatively stable throughout the recession, other, more missional shifts may be in play that influence the direction and ultimately the impact of the giving from religious organizations.

Next week, a group of several hundred individuals, families and foundations who give over $200,000 annually to Christian ministries will come together in Arizona for an annual conference called
The Gathering to learn from and support each other.

Fred Smith, President of The Gathering, observes that historically, the focus of international giving from US religious communities, particularly evangelical communities, has been to projects focused on evangelism. He observes an increased interest from younger generations of evangelical givers to tackle thorny social justice problems like hunger, trafficking, domestic violence and other issues around health and education.

While evangelical Christians may be beginning to shift their focus of giving towards more relief and development activities, multilateral institutions like the World Bank and bilateral aid agencies like USAID are also just beginning to understand the dimensions of giving from private sources, including from the religious community. Thirty four percent of the $8.6B given by religious organizations in the US in 2007 to developing countries went to educational projects as compared to 4% of the $3.3B given by US foundations to education in the developing world.

While Evangelicals curiously observe the movements of the Obama Administration, the Obama Administration is clear that with regards to foreign aid, the private sector is a critical partner for public diplomacy as well as development. Religious organizations, foundations and even congregations are not necessarily new partners to the US government, however these private actors are sizeable, dependable, committed, and potentially changing their focus to becoming a different kind of partner or ally to overseas development assistance. This shift may be worrisome to the old guard of the faithful but welcomed by the younger generations.

-Heidi Metcalf
Deputy Director
Center for Global Prosperity

Tuesday, September 1, 2009

Capitalizing on the demographic dividend

On August 27th, the Economist published an article on Africa’s population and demographics titled “The Baby Bonanza”. In this piece, the authors describe the “demographic dividend” which is predicted to occur in Africa as a result of the demographic transition to a larger working-age population. The term, “demographic dividend”, was first coined by David Bloom, who emphasized the importance of demography to economic growth. Bloom attributed a large portion of the economic growth of East Asia in 1965-1990 to the region’s large working-age population, which led to the increase in productivity. On the other hand the slow growth of Africa during the same period was at least partially attributed to its large dependent population. Thus East Asia was able to cash in on its demographic dividend, while Africa was not.

However, this may change. If the United Nations predictions are, in fact, true, then the fertility rate in sub-Saharan Africa could drop to three by 2030 (it is currently estimated at five children per woman). The drop in fertility rate with the already present growth in the middle class has the potential to increase the working-age population which in turn could increase economic growth in the continent. To capitalize on the demographic dividend, a proper environment is needed. Currently, Africa is facing food and farming land shortages, deforestation, an HIV/AIDS epidemic, conflict, and institutional corruption. Needless to say, none of these factors are conducive to economic growth. On the other hand, the rapid spread of technology and innovation throughout the continent whether in agricultural developments or in education, may help Africa to capitalize on its demographic dividend. In addition to the potential for technology to help Africa capitalize on its working-age population, proper policies in foreign aid can also contribute to the dividend if donor governments start to take demography into account.

Bloom emphasized
three policies that can increase the demographic dividend (i.e. the economic growth resulting from a large working-age population): public health improvements to catalyze the demographic transition; family-planning programs to accelerate the demographic transition; and reformed labor markets and increased rule of law to allow business to exploit the demographic opportunities.

There are ways to integrate some of his suggestions into foreign aid policy. For example, in regards to the public health perspective, a larger increase in the working age population may also call for broader health programs that include chronic diseases and preventive measure to extend life. The third policy, which strives to maximize the use of the working-age population, calls not only for labor-market flexibility, but also for good governance. US foreign aid policy can play a huge role in improving rule of law by asking for accountability from recipient governments. With an accountable government in place, private investment, both foreign direct investment and investment in small and medium enterprises, is more likely to flow and successfully generate business growth which can capitalize on the working age population.

The short window of opportunity for a nation to capitalize on its demographic transition requires timely action and a favorable business environment. Donor governments, including the US, can help ensure that such an environment exists by taking demography into account when making policy.

-Yulya Spantchak

Research Associate
Center for Global Prosperity