Spend Your Donations Wisely on These 5 Cost-Effective Methods for Reducing Global Poverty through Business and Microfinance

Have you ever felt frustrated about your charitable donations? Do you fear that your hard-earned money is being squandered on high salaries and fancy buildings, rather than truly making a difference in the fight against poverty? Have you witnessed development programs that seemed to lack real impact and left you questioning the effectiveness of aid?

In this article, I will share five scientifically proven and cost-effective methods for reducing global poverty through business and microfinance, so you can make informed decisions about where to donate and ensure your money is making a real difference.

I will talk about:

1. The 3 biggest problems with foreign aid
2. A new framework how we can make aid more effective
3. 5 scientifically proven, cost effective methods for reducing global poverty through business and microfinance

Let’s dive in.

The 3 biggest problems with foreign aid

1. Foreign aid creates a dependency culture

In her book “Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa”, Zambian professor Moyo critiques the effectiveness of foreign aid in Africa and argues that it has done more harm than good. Moyo calls foreign aid not only ineffective, but “malignant”. Aid creates a dependency culture and undermines economic growth by distorting markets and creating inflation. If people expect to receive money all the time, it creates dependency and the recipients are not stimulated to become independent.

Also, as stated on the Givewell blog: “An influx of donor funding into a community may distort the community's existing dynamics, strengthening some locals (those with better access to the aid, who may be more privileged and/or powerful to begin with) at the expense of others.” In our work with church planters in Africa and Asia, we see this all the time. When some locals receive money, the status of these people change. Other people from the community consider them “rich” and they are expected to help the community members. If not, they will be excluded from the community.

2. Poorly executing of development programs

A lot of development programs are not executed well. For example, money is given to people to start businesses, but there is no business plan, no training, no coaching, follow up and accountability. That is why, with our Business for Movements approach, we work with a rigorous process that last several years to be fruitful. We do training, intense coaching, and set up Savings Groups and Faith Funds to help church planters start fruitful businesses. We track and evaluate rigorously.

3. Ineffective programs

A lot of develop programs are ineffective. The intervention in itself is not helping the people. For example, did you know that research has shown that handing out computers to schools have shown to be ineffective?

Also, growing and selling fair-trade coffee not be as effective as you thought. The fair-trade system is flawed as it leads to oversupply when global coffee prices decrease. When fair-trade guarantees higher prices for growers, more farmers become certified, resulting in a decrease in the proportion of beans that can be sold at the premium fair-trade price, ultimately reducing the benefits for growers.

This leaves us with this question:

What are the most effective development programs? What makes foreign aid effective?

To answer this question, we first need to know what “effective” development means.

Measuring effectiveness of aid based on Human Dignity

Professor Bruce Wydick researched the effectiveness of development programs in the world and wrote a great book about it called “Shrewd Samaritan: Faith, Economics, and the Road to Loving Our Global Neighbor”.

Wydick proposes to address global poverty through the Human Dignity framework. This framework is based on the fact that every human being is created by God, has intrinsic value as creature and is made in the image of God. As human beings we have received the mandate to steward the earth. We do that, as I shared two weeks ago in my newsletter, by creating. We create something inherently good.

Human flourishing is captured by the Hebrew word shalom. People that know me well, know that I sign most of my emails with the word shalom. It means living in wholeness, wisdom, prosperity, and creativity. It also includes living in harmony with God, neighbors and nature.

With our aid, we always want to think through the lens of Human Dignity.

For example, in buying a meal for a homeless man, we recognize and affirm his human dignity. When we help exploited child prostitutes off the street, we redress violations to her dignity. It’s not only that we help people restore their human dignity, but also the motivation how we do it matters. Consider the difference by carelessly tossing a $5 bill to a homeless man (which violates his human dignity) compared with stooping down, looking him in the eye and wishing him well while giving the $5 bill (affirming his human dignity).

Thinking through the lens of Human Dignity means that we don’t only look at the most cost effective way of the intervention, but also on the social, spiritual and environmental impact our invention makes.

Crucial to the Human Dignity framework is the concept of mutuality. Too often the poor are seen as recipients of “our” interventions (read: money and wisdom) who are not able to contribute much and can’t make decisions for themselves. I once heard a story of a popular missionary in a region. Upon asking why he was so popular, the people said: “He is asking for our help!”

If we want to intervene on behalf of the poor, we should help them flourish, so they will be directed to use their talents and resources to influence others.

Wydick rated the global development interventions with 1-5 stars, based on 3 different factors:

1. Effective - Is the intervention doing what it supposed to do, irrespective of the cost and yields towards the broader Human Dignity aspects?
2. Cost effectiveness - To what degree does the intervention fosters Human Dignity related to its costs? This metrics contains three factors:
3. How effective is it in the domain of impact?
4. How important is its domain in the larger picture of human flourishing?
5. How much does it costs?
6. Generalizibility - Can the intervention be used across different contexts? Or does it only work in one specific context?

The effectiveness of 5 global development interventions regarding business

Above you will find the ratings of the most researched 5 global interventions around business.

Microcredit has gained a lot of popularity, especially since Muhammed Yunus and the Grameen Bank started lending to the poor in 1983. Research shows positive and negative impact of microcredit. On the negative side, studies showed that microcredit fails to show an impact on improvement of household spending. A challenge with microcredit is that the recipients of the loans can become indebted because they receive loans without having proper business training and mentoring/coaching in place. They spend the money and are stuck paying back the loan without having a source of income. We are seeing this problem as well in our projects in Africa.

On the positive side, there is evidence that microcredit increases the size of small businesses, the hours that entrepreneurs devote to their businesses and freedom to expand them. And if borrowers spend more time in their businesses, and less time in the labor market, they create jobs. This tightening in the labor markets will push up wages for everyone. Microcredit is relatively cheap so it gets 4 stars for cost effectiveness.

Micro Enterprise Business Training has shown to be important and helpful, especially for helping people to distinguish between personal and business money. Wydick gives it 3 stars in effectiveness and cost effectiveness, but only 2 stars in generalizibility. A lot of Micro Enterprise Business training is formal, developed by the West, and doesn’t match the African and Asian culture. Most Africans don’t like to read and write and a lot of them don’t know how to. One of our leaders commented: “Africa is not a writing culture.” In our projects we use the Pioneer Business Planting material that is specifically designed for Africans and Asians. We use a Graphic Curriculum that consists of pictures and use a lot of games and exercises to train.

One of the biggest challenges for everyone, and certainly for Africans and Asians, is to transfer knowledge and put it into practice in your daily life. Entrepreneurial Mentorship Programs have proven to be successful. A randomized trial study of 372 young entrepreneurs in Kenya showed that the businesses of the mentees that received mentoring were four times more profitable and three times more likely to have at least one employee. Why did this work? The mentor helped to give information that was needed in the situation the mentee was in. In our projects we start coaching people after they have done the Pioneer Business Planting training. We help them do research, develop a business plan and find funding.

Microenterprise Grants have proven to be successful as well. A study in Nigeria awarded 729 people with a $50,000 grant in a business plan competition. These were given as cash payment, conditional on achieving basic milestones. After three years, these entrepreneurs were 37 percentage points more likely to be in business than those of the control group. Microenterprise Grants is highly effective, especially combined with training and coaching.

The most controversial global intervention is the Unconditional Cash Transfers. The controversy revolves around whether the poor can use the cash wisely to invest in business or they use it to use it to buy alcohol. Research has shown that they don’t. Cash transfers have shown to increase recipients assets by 58 procent. There was also a decrease of children skipping school. On the downside, non-recipients were extremely dissatisfied for not being selected. To conclude, there is strong evidence that Unconditional Cash Transfers create short- to medium-term impacts, but less evidence for long-term impacts.

Conclusion

In our work in Africa and Asia we live this phrase out:

Don’t give them a fish, but teach them how to fish.

To work on lasting change and Transformation of Nations, I believe we should have an holistic approach. There needs to be transformation of minds, hearts and hands. Through contextualized business training we transfer concepts and knowledge to open people’s hearts and minds. Every time I engage with Africans and Asians in our trainings, I see their minds being opened. “I never knew this!” “I wish I knew this 20 years ago!”. From there they embark on their journey to a better life.

Having a mentor, a coach, in invaluable to this process. He or she will listen, encourage and give you the right network, information and tools needed at the right time and place. And not only that, this person will also keep you accountable to the goals you have set yourself.

From this place, and only with a process of training and coaching in place, I believe we can make Microcredit and Unconditional Cash Transfers work effectively.

Next time, when you want to make a donation, think about the effectiveness of the interventions and choose well, so your money makes the most impact.

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