Microfranchising: Depth and Breadth in Development, Pt. II of II

(this might make a bit more sense if you read the previous post first)

Getting on with it, one way I like to think of development is in terms of breadth – how many people it can reach; and depth – how much it can really impact the poor at the ground level. Grassroots or bottom-up approaches generally have impacts that are pretty profound on a limited number of people. One organization with which I worked – Ashraya Initiative for Children (AIC) – touches 12 children in its orphanage and another 200 in its educational and health outreach. They are doing amazing things in the lives of these 12 kids and doing much good for the others, but is this really changing the face of poverty in a country where 450 million live on less than $1.25 a day? You need a lot of AICs. A lot.

On the other hand you have top-down approaches, which tend to reach many more people but individually aren’t as impactful. A CLUSA management director explained the top-down push and resulting dilemma when we chatted last December: “A lot of donors are pushing us and myself included, and they said ‘Steve we need 50,000 farmers.’ ‘Well what can I do with 50,000 farmers? Yea I can make a little bit of an impact, but really, if Rob goes there, he can’t actually see it.’” This was contrasted to another NGO which I won’t name, who’d been there for 10 years and had gone pretty much nowhere with the traditional top-down approach – it was, in his words, “doing everything and nothing at the same time.” If you're trying to think in terms of government top-down, think of liberalizing trade between two countries, which may make prices slightly cheaper or products more available to all locals throughout the country, for example, but it’s not going to be hugely detectable per person.

This is one reason I like microfranchising. It has a wide-reach business approach that directly puts money in the pockets of the poor. In Ghana, FanMilk employs 7,000+ agents currently, and the company is also operating in Nigeria, Cote d’Ivore, Burkina Faso, Togo, and Benin. And this is just 7,000 at this given moment – the company has been operating over 40 years, with agent employment averaging eight years. This is all profit-driven: It has cost you, the Western taxpayer, nothing.

Microfranchising also works well for development for another main reason. The poor lack basic education and are, I’ve come to believe, generally uncreative. Expecting them to design and manage a profitable business is pretty unrealistic. For someone who is just trying to sustain oneself, I don’t think this should come as a surprise. I saw this with microfinance in Bangladesh – with the small-size loan groups, you see a lot of reselling. There wasn’t much value-added. Microfranchising takes the guesswork out of it.

So am I bashing microfinance? Only partly, because it’s a bit like comparing apples and oranges. Microfranchises and microfinance institutions (MFIs) are two different concepts. An MFI is more like the franchisor in the microfranchising approach – it’s the central business unit. The microfranchise is more like group lending in the microfinance approach in that it’s the distribution channel for the products – ice cream and loans in this post, respectively. In this way, I think they are both quite effective. Yet, coincidentally they both usually result in microbusinesses, and this is where I think microfranchising has the upper hand. With microcredit, rural villagers are, as I already noted, not adding much value and not able to take advantage of scale economies. They are producing a very inefficient product, and often diverting resources (credit) away from more appropriate SMEs. At the same time, a microfrachising approach is very scalable or easily replicated, though the MFI’s microbusinesses aren’t (though the lending is…so again I’m comparing apples to oranges).

There’s a lot more to microfranchising, and I’m hoping to look into it more here since there are a number microfrachise schemes operating, like CareShops, but I’ll spare you the details and only suggest that if you’re in NYC, try to get your hands on that FanYo.

Microfranchising: Depth and Breadth in Development, Pt. I of II

“One problem with development is that you have to figure out what’s your focus. Do you want to work with a million farmers or do you want to work with a thousand farmers and get it right?”

--CLUSA Mozambique management official, during a conversation last December

Meet Kwame. For the past three months on his summer school break, he's been spending his days, from about 7:00 or 8:00 in the morning until sometimes as late as 9:00pm, selling frosty yogurt, flavored ice, ice cream, and other refreshing cold items (Tampico, below) which sell well (I can attest) in the brutal Ghanaian heat.

What’s different about Kwame than other street hawkers is that he’s selling a branded item. These refreshments are produced by FanMilk, a Dutch-founded Nigerian company. FanMilk recruits the poor to sell their goods to thirsty guys like me, pretty much anywhere hilarious English is spoken in Ghana...which is everywhere (post coming soon). They’re dispatched on bicycles or with a walking cart, like Kwame, and are always honking their bike horns to get attention (in fact, I can hear one as I type this). Kwame said he can earn up to 10 GHC (~$7) in a day, but had to deposit a down payment of 30 GHC to as collateral against the cart. His brother helped him with this. And all franchisees are required to save 10% of their profit, to be returned to them when leaving the company. You can probably imagine how this extra money is helping himself, his education, and/or his family in pretty tangible way.

FanMilk is a for-profit business that uses the conceptof microfranchising – somewhat like McDonald’s, but for the little guys. It uses pre-prepared business templates that allow it to scale quickly. For Kwame, he didn’t have to think about which products to sell, how to distribute the product, or what price to charge. But, he’s responsible for running his own business – he knows how many items he needs to sell to break even and has a selling strategy to accomplish this (e.g. where to take his cart and when?).

I finished my last post before the caveat post by saying I was going to talk about a development approach that’s pretty near the junction of top-down and bottom-up development approaches. I was misleading – rather I think it’s an approach which has results that correlate well with results of top-down and bottom-up approaches simultaneously. It’s the end, not the means. I've broken it down so as not to strain your eyes - I'll get into it next post.

A Response: Is Top-Down Development the Answer?

I was planning to talk in my next post about an approach that I think sits at the cross hairs of top-down/bottom-up. But, the provoking comments and emails on the last post proved to be a heavy helping of mind fodder, it got me to typin’, and eventually the response took a life of its own like my tomatoes in the back of my fridge. Shame...tomatoes are expensive here in Ghana.

To sum up the comments on the last post: Do I buy top-down approaches to poverty alleviation?

The post takes a one-sided perspective, I suppose, to play devil's advocate. Perhaps killing the suspense (I know you were on the edge of your seats), I’ll go ahed and tell you that I buy Kofi's argument, but only conditionally that it is one component of a broader arsenal of poverty alleviation tools, and should be paired with bottom-up methods.

There have been some successes of top-down approaches to development, aid-driven or not. To give a couple examples, China's SEZs and big government initiatives have made substantial inroads, though inequality is staggering and widening (however this is generally what we see when countries become more capitalistic - see Russia). “Poor” in China is not the same as “poor” in Africa – I’ve found this out when visiting villages in China and digging deep to see what injustices the government had done and how overwhelming their poverty was, coming back mostly empty-handed. And I noted Ghana's success with the banking sector as another example.

HOWEVER, I think Jes and Thomas, the commenters, are right too – top-down approaches (talking aid now; I'll get to business separately) have overwhelmingly failed to distribute wealth evenly. But I think, at least for the big aid side, it's because they've been sending the wrong incentives. What I didn’t tell you about Ghana’s success story was that it came after 19 adjustment loans (loans based on policy conditionalities) from the World Bank/IMF tag team. Adjustment loans were based on governments promising to change, rather than a proven track record. Thus, the worse a country’s policies – which you could see in high inflation rates, high black market premium (manipulation of exchange rate), etc. – the more money it received. I’m not saying give the money to rich countries, but rather tie the aid to the track record instead of promises to change (fortunately, this is starting to happen).

And, the entire incentive system of donor organizations is misguided – how many industries are there in which your goal is work yourself out of a job? As I realized after meeting with a World Food Program director to discuss the extension of WFP’s support in northern Mozambique, the people deciding to continue the NGO programs, at the end of the day, are mostly the same people whose jobs are at stake.

Looking at top-down business aside from top-down aid, I think it only gets you halfway. Providing income and job security is where big business can thrive in poverty alleviation, but simply having a low-wage job doesn’t ensure that your family can escape the poverty cycle.

Bangladesh has been largely transformed by the textile industry, which arrived when foreign investment by South Korea’s Daewoo started up one plant in 1980. Now the textile industry employs 3.5 million people and accounts for 80% of the country’s exports. When I was staying in Dhana’s industrial area, I’d watch every day as women in their colorful sarees would head to work, and I even visited one of the factories (and got kicked out when they thought I was asking too many questions). When I went into the slums for interviews, I found that textile jobs were helping, but workers weren’t escaping the cycle.

This is where there are opportunities for grassroots NGOs and bottom-up approaches. Bottom-up approaches, by definition, build on local capabilities rather than trying to overcome their weaknesses. Grassroots organizations can provide things that normally aren’t offered to the poor, like access to credit, which uses the local characteristic of the poor placing a high value on reputation. And big businesses, geographically speaking, don’t reach everyone. People flooded to Dhaka – the textile industry and other job opportunities weren’t in the villages. This is where NGOs can do things like helping develop village enterprises or cottage industries, in which they help the poor make and market handicrafts for high-end markets.

I don’t think this answer of “both” comes as a surprise to many people reading this. It’s pretty clear that there’s no single answer to poverty alleviation, especially with the poor at varying rungs of the economic ladder and countries in varying stages of development. Again, I appreciate the comments and emails – it keeps me thinking. If only getting side-tracked could always be this productive!

Which Came First: the Economy or the Education?

Most of the people reading this blog, including its author, probably think education is pretty important in battling poverty. It’s the first thing many people list when talking about solutions to poverty. I recently had the chance to have lunch with Vandy grad Kofi Dadzi, who made some compelling arguments about education, big aid NGOs, and how you make a country grow.

Kofi is an incredibly sharp and fascinating guy. A computer science graduate and former Dell employee, he and a friend co-founded the Ghanaian tech company Rancard Solutions that links international media companies to telecom companies in Ghana. They create the platform that allows things like those annoying ESPN text message updates that my friend Justin gets every time Derek Jeter so much as yawns. It’s a pretty impressive company he’s built. Eventually we got talking about how to solve poverty. Education is like the flour in the cake, right? – it’s the main ingredient. The more educated a person is, the more empowered (us poverty people love that word) he or she is. However, Kofi echoed a view I’ve heard before when he said, “Education doesn’t matter unless you have the economy that can absorb the newly educated workforce.” What he’s basically saying is pretty important: if we’re talking about priorities, let’s forget about education and just get this economy humming.

Once there are jobs opportunities, people will demand education. In Zimbabwe right now, I wouldn’t say educating oneself is pointless, but when you don’t know what policies will be different each day when you get out of bed, how compelled will you be to invest in the future, to demand education? And even if you think someone would be motivated to get educated to leave the country for jobs, well, that furthers the point.

So how do you get a country to grow? Kofi thinks NGOs for the most part have been prohibiting Ghana from developing its own capacity. All of NGOs’ nice little “micro” ideas – a word donors round the world love to hear – just aren’t going to get a country’s economic engines going. He thinks bigger. What Ghana needs are big industries, or pro-business reform like the liberalization of Ghana’s banking sector that saw the number of banks increase from 7 to 143. The proliferation of banks and inflow of capital required banks to lend (at more competitive rates) to survive, in turn spurring business activity. In a relatively natural progression of growth, these domestic businesses grow, saturate the local market, and then look outside the country for more opportunities. This brings that outside money back home, like Kofi’s company is now trying to do in Nigeria. Helping companies enter foreign markets – like the Ghanaian government didn’t do for him in Nigeria – is another way to foster business growth. With all this business growth and new job opportunities, people want to get educated. And fostering business growth, I argued, is what some NGOs (like TechnoServe) are helping to do. NGOs aren’t pointless. I think it was a point taken.

Let’s go back to this assumption that growth comes before education. Is this really how it is? From 1960 to 1999, economist William Easterly notes in The Elusive Quest for Growth, there was an educational explosion from 1960 to 1990. Primary education reached 100% in half the world’s countries by 1990, compared to only 28% of the countries in 1960. Meanwhile, secondary education quadrupled from 13% to 45% over the same years. Studies conducted have found no association between education growth and economic growth per capita. The graph pictured bears this out pretty clearly. But there is a relationship between initial schooling and subsequent economic growth, perhaps because if you know growth is going to be robust in the future, the skilled wage will be growing faster, and so people have incentives to invest in education. Easterly notes, “The magnitude of the relationship between initial schooling and subsequent growth is more consistent with the story of growth causing schooling rather than schooling growth.” Plus, if a country is poor because of lack of skills, the few skilled workers should be earning a lot. But then why are all the educated Indians going to the US (this trend is not as solid as before)? Wages for the skilled are much higher in the US than India. It doesn’t pay to be a big fish in a little pond.

Education is good, but only under the right circumstances. There needs to be job opportunities. The way Kofi explains it, getting this going sounds more top-down. My Ghanaian colleague at TechnoServe agrees. But what about bottom-up/grassroots approaches? In the next post I’ll talk about an approach I think hits them both.

Creative Solutions for the Poor (an engineer wouldn't hurt)

Along with current Vanderbilt student Ari Herrick and two of her friends, I traveled seven hours in a series of tro-tros that took us to the bustling fishing village of Akwidaa, located a few hours west of Cape Coast (the notorious heart of the trans-Atlantic slave trade). On our last tro, I met a man Stephen Apwidaa, who was a primary teacher in Akwidaa and soon became known to me and my friends as “Stephen the Teacher” (my friends in the back of the tro met “Charles the Goldminer”). Stephen and I chatted it up, and he invited me to his home. He passed the this-guy-doesn’t-just-want-to-be-friend-for-money test, and so I said maybe I’d wander over tomorrow.

We stayed at the idyllically set Green Turtle Lodge at the cost of $4.50 a night and a butchering of our ankles by mosquitoes that had us itching late into next week. We had a great time, but after laying on the beach for a whopping total of 20 minutes and wearing out myself bodysurfing, I got curious and tired of being a “tourist”, so partner in crime Ari and I moseyed on over to Akwidaa. We inquired for Stephen the Teacher, and it didn’t take long before 12-year-old Joseph led us to him, with children swarming and holding our hands to guide us.

Stephen took us to a chop bar, where we enjoyed Fantas and talked abouthis family and the village. A father of four, his oldest son had just completed high school, and though he wanted to send him to a university to pursue his son’s interest in land economy, finances didn’t allow it. His son would stay home to work until next year, when Stephen would look at the possibilities.

We talked about several topics, including jobs. It seemed like fishing was still intact, but coconut sales from the palm trees were starting to drop off and as a result that form of livlihood. He pointed to some nearby brown palm trees, according to him affected by water pollution from oil – possibly the recent oil spill near his community. “They will not produce again,” he explained.

At the same time, they have no electricity. He pointed out the door to a nearby steak in the ground which demarcated the future installation of a light pole, but the government had not yet acted. Even if the power grid were to be extended to them, it’s a wonder how consistent it would be and how many people would benefit. Ari and her friends live just two hours outside of Accra and say power outages are common.

The most compelling problem was that of rubbish (don’t worry, I’m not coming back a Brit). They piled a lot of their garbage on the rocks very close to the water (see pic), and when the tide came in with bad weather, it would wash a lot of the garbage inland to the beaches of their estuary that bisects the town into New and Old. Why they couldn’t pile it somewhere else got lost in translation – maybe it was because no one wants to live next to a landfill. As a result, they were burning the trash or burying it in the beach, and the garbage that was washing up was having to be raked up by government workers (see pic).

So, taking all this together, there are job, energy, and waste problems. This may be just optimistic thinking or actually an opportunity for bottom-of-the-pyramid engineering (or both), but wouldn’t it be amazing if the trash, or at least some of it, could be converted into energy? It could help light the town. And trash might then become, in an odd way, potential revenue. It could employ collectors or pay people small fees for bringing it to the conversion center, where employees could convert it. This is almost certainly wishful thinking, but just because it hasn’t been done before doesn’t mean it can’t be done at all. And at the very least, thinking creatively about solutions for the poor gets the ball rolling. For proof, see here.

Would You Pay to Save?

That’s not how it’s supposed to work. Banks are supposed to pay you. But a lot of people here in Ghana (the poor), are paying in a system that’s called susu. The origin of the word is debatable, but it refers to rotating savings. The way it works is that a Susu collector comes around the village and collects a daily or weekly installment, usually a very small sum, from his agreed-upon customers that have formed a group. At the end of the month (or whatever cycle they are doing), the Susu collector keeps one installment’s worth as his wage. Each time the group members make a payment, someone in the group receives the full sum. So if there were 30 people in the group making payments of 2 Ghanian cedis (1 cedi = $1.4), each time the entire group makes a payment someone would get 58 GHC. The susu would earn 60 cedis in the month.

It might seem counter-intuitive to pay to save, but the kicker here is that for those who receive the first payments, it’s basically an interest-free loan – they only had to put in a few cedis to get the 58. But for the later ones, it’s like forced saving with slowly decreasing interest rates (I'm not yet sure how they decide the order and how it is made fair the next cycle). This creates an opportunity for people to access savings schemes and credit in deep rural areas that wouldn’t otherwise have it. Seven out of the 13 banks in Ghana's north region have no banks. Susu collectors generally take the pooled savings and put it into a rural bank – with the money pooled together he (typically they’re men) can access banking products for the group that no individual member could. The Susu collectors usually have anywhere from 200-500 customers, according to Kwaku Akwetey, the General Secretary of the Ghana Co-op Susu Collectors Association (GCSCA), who I recently met for discussions about using susus in an upcoming project for TechnoServe.

So what’s the difference between microcredit and susu? From my understanding, and it’s still very basic, is that the susu system is focused more on savings – having a secure place to save – with the benefit of having access to cheaper credit. Microcredit in the Bangladesh form, on the other hand, focuses more on lending, and operates on the principle of peer pressure that access to credit is only open if everyone is making a payment on their loan. The peer pressure component is present in the susu system, but rather peer pressure that compels you to save. For Ghanians, the microcredit loans done by the rural banks are at annual interest rates of about 30%, and are given to the entire group. Susu collectors do offer loans outside of the typical rotating savings payments (at similar interest rates), but they go to the individual.

Of course, this type of informal banking can be rife with fraud. The Susu collector might not deposit the correct amount collected, for example, or one of the first people to receive the payment could just stop making installments, causing the rest of the members to lose part of their savings. I assume this works better in villages where everyone knows everyone. I recently visited a village (which I'll talk about later) and my friend and villager Stephen explained that crime is never an issue. Because of the fraud, there's an effort being made to formalize it, which is what GCSCA is all about.

This is another prime example of how the poor have to pay extra for the same products we take for granted. Sachet marketing - the strategy of selling small amounts of things like Head 'N Shoulders shampoo - is huge in every country I've been to. And pay-as-you-go cell phone schemes are comparatively expensive - in less than three weeks in a country 67 times poorer than the US, I've already dumped $15 into phone credit compared to my monthly US bill of $15, and I don't even know many people here!