People who work for non-profits often have a strong social conscience and a desire to "do good." Good intentions, though, are rarely enough to ensure effective outcomes; they must be combined with business skills before these organizations can achieve their goals. In this edition, HNN presents a special report devoted to non-profits that are trying to learn how to function like, well, for-profit businesses. The first article surveys a number of organizations that are grappling with this challenge, while the second takes an in-depth look at Aseema, a Mumbai-based non-profit that has been struggling to build a products division -- with some support from Wharton students. The third story, an essay by the founder of a non-profit organization, challenges conventional ideas on how poverty can be fought.
Indian NGOs: In rain-starved villages in the remote interiors of India where subsistence farming has long been the norm, farmers have been driven to debt and death by the vagaries of the weather. Uncertain monsoons have forced many farmers to choose between migration and abject poverty.
Muniyappa was one such farmer. Maintaining his 1.5 acre banana farm in the rural districts of Bangalore was becoming a struggle, one he was ready to give up for urban life. What changed his mind was a product called KB Drip, an irrigation system that ensured controlled and year-round access to water. The product was developed by IDEI, the New Delhi-based Indian arm of International Development Enterprises, a non-profit in Lakewood, Colorado, that aims to use "market principles" as it works to help rural farm families improve their agricultural productivity.
Sumita Ghose, founder and CEO of Rangsutra, a Gurgaon company that focuses on livelihood issues of rural artisans and farmers, started the company 15 years ago as a non-governmental organization (NGO). But over time, she decided the NGO model didn't work best for Rangsutra and turned it into a business. Says Ghose: "Ownership is a very big motivating factor, and we decided to start a company with artisans and farmers as shareholders."
IDEI and Rangsutra are part of a growing breed of nonprofits and other Indian entities working for the underprivileged that have become business-savvy and embraced modern management methods. India has always been a fertile ground for social issues of all hues. Its rampant poverty, unemployment, disease and illiteracy have drawn voluntary organizations and financial support from philanthropists, charities and religious trusts.
That old order is changing. Social commitment is no longer the preserve of voluntary workers. Conventional business and management metrics are being bundled into a package with unconventional means of finance to provide unique solutions for large social problems. Knowledge@Wharton spoke to NGOs and their financial sponsors who are making the transition from a "charity mode" to a professionally run model in an attempt to grasp the nature and extent of the changes underway. In the emerging NGO landscape, scale is important and so is sustainability. And both depend on an innovative and steady flow of funds.
IDEI produced a Bollywood-style film to promote the $30 KB Drip and convince farmers about the benefits of drip irrigation. It has so far sold innovative irrigation products to more than 85,000 farmers in India. It is one of the many companies backed by Acumen Fund, a global non-profit venture fund based in New York City, and part of the Fund's $1.4 million "water portfolio." Varun Sahni, the Hyderabad-based country manager of Acumen Fund in India, says his fund chose to back IDEI because, "we look [to support] ventures that are going to have lasting social impact."
Life as a corporate entity is proving to be more bountiful for Rangsutra. Its artisan shareholders invest an initial Rs. 1,000 each ($22) and have a say in the company's operations. In its first year (2005-06), Rangsutra managed to break even with revenues of Rs. 26 lakh ($56,500). "We are planning to go over Rs. 1 crore this year ($218,000)," says Sumita. Rangsutra is supported by Aavishkaar Venture Funds, which is described by its CEO Vineet Rai as a regular commercial fund that "wants to invest in businesses that make money with a social commitment."
The lines between for-profit and non-profit ventures are beginning to blur. The focus everywhere, not just in India, is on building sustainable development models. There is also an increasing realization that the traditional models have had a limited impact on the problems they sought to resolve.
A glaring example in India is the education sector. Over the years, there has been sustained government intervention through programs like the Sarva Shiksha Abhiyan (mass literacy movement) that aim to put every child in school. Lots of NGOs have been working in the sector for decades. And even though there are instances of remarkable achievements by individual NGOs, observers say these efforts have yet to translate into a significant nationwide impact.
A survey conducted in 2003 by Pratham, a Mumbai NGO active in the city's slums and backed by Indian private bank ICICI Bank, is revealing. The survey says the percentage of children in the country who can read nothing and those who can read only the alphabet is about 52%; 40% drop out before completing primary school; and 11% of the children do not enter school. "We realize that a single experiment is not going to make a difference," says Usha Rane, director-curriculum at Pratham Resource Centre. "At Pratham, we think like the government. We think mass."
Scale Matters
The majority opinion within the social development sector is that it is not enough to create isolated models of excellence. As Rane explains, "It is necessary to create a mass movement." Pratham operates out of 14 states. In the 10 years of its existence, it has developed reading and mathematics kits that are being used to teach the basic concepts to unlettered children. Nearly 1.6 lakh children have benefited from the program in the last three years.
Like Pratham, many NGOs are working scale into their operations. Muthu Velayuthan who has been involved with migration and livelihood issues in the villages of Tamil Nadu, Karnataka and Andhra Pradesh, has set up a rural production and retail network under the brand "Aaharam." He says that his work in the villages showed him the tremendous potential that is locked up in the Indian rural framework.
He developed Aaharam as a supply network that organizes small self help groups into a federation and links that to a producers' cooperative. That cooperative in turn processes the agricultural produce into a range of agro products such as spices, pulp and juice. It also retails these in the rural market.
In its first year, Aaharam reached out to 1,000 families and created an inter-state platform of 160 federations. Its current monthly turnover is over Rs. 3 lakh ($6,500), and it is expanding its network of states and federations at great speed. "Our mandate," says Velayuthan is "to promote traditional markets."
Aaharam, like several such organizations, walks the line between social responsibility and commercial success. It applies corporate marketing and business strategies to further the interest of a marginalized population. And in the process, it builds economies of scale into its operations.
Devashri Mukherjee, the Mumbai-based director of venture programs at Ashoka: Innovators for the Public, a global association of social entrepreneurs based in Arlington, Virginia, points to another example: Nidaan, a company run by Arbind Singh in Bihar. Singh focuses on the very poor and marginalized sections of society in one of India's most backward states. He organizes them into co-operatives and links them into a marketing group that not only protects their rights but also guides them to making financially sound decisions with respect to sales and production.
What emerges from these experiences is an innovative chain of scale, professional management and funding support that links these organizations in a web of sustainable growth. Scale increases the bargaining power of groups. A professional management team sharpens focus and enhances efficiency. And finance works in two ways: as a catalyst that helps build the other links in the chain and as a growth pill that creates sustainable models out of small beginnings.
Clicking on the Right Links
Traditionally, fund support has been a key imponderable for NGOs. Since most NGOs were -- and many still are -- primarily dependent on grants and donations, they faced the constant threat of their money resources drying up.
There are two ways in which the sector is getting around this problem. One is through the well documented rise of micro finance institutions (MFIs). Micro credit has had its successes and failures, but MFIs have helped significantly increase awareness and interest in the rural sector. The other development is the emergence of social venture funds such as Aavishkaar and Acumen and the development of organizations that link donors to NGOs such as Give Foundation of San Jose and Kiva of San Francisco -- both are active in India.
Exploring New Organizational Models
On the one hand, these developments have deepened the financial market for the social sector. On the other, they have forced NGOs to break out of the traditional charity models that they were built upon. Says Vinay Somani who has set up Karmayog, a Mumbai-based B2B for NGOs, "Outside funding agencies bring in best practices, force NGOs to become more transparent and lead the entire sector to a system where self sustainability becomes a specified goal."
Finance, along with scale and professional management practices, is creating a network of sustainable organizations. The Aaharam network is illustrative. Velayuthan experimented with other forms of social intervention before he decided on a group-based income generation model that according to him "seemed to be the answer to rural poverty and migration issues."
Velayuthan was not the first to try out this model, but he designed it with commercial and contemporary management practices. He used money from microfinance institutions to set up a company, set specific production and sales targets (for example: the amount of mango pulp to be sold in a month) and ensured that the company scaled up within a given period of time. He also worked to build strong managerial skills among his team by organizing monthly meetings and routine interactions with private industry.
Aaharam's goal is to address food, nutrition and income security of producers from resource-poor areas. It largely works with rural women, taps into their expertise to make a wide range of agro products, and helps them market these through a company within a specific district or zone. "We wanted to stop migration [out of rural areas], and the only way to do that was to create reliable income sources during lean agricultural months," says Velayuthan, whose initial funding came from MFIs. "We looked at five broad areas where this expertise could be used, and classified these as neem, tamarind, medicinal plants, traditional crafts and charcoal."
Velayuthan says he faced his biggest hurdle in setting up the company; next came the first milestone of breaking even. Aaharam charges its members a fee. This serves as working capital for the company. It also seeks out marketing and retail tie-ups that would bring in funds for expansion and business development. It already has a tie-up with the Mumbai-based Parle group for the sale of mango pulp and has recently entered into a contract with Bharat Petroleum for producing fuel pellets from agro-waste.
Aaharam is only one of the instances of the work being done in the rural sector. Says Vineet Rai of Aavishkaar, "The entire rural space has come alive in the past few years. There is a huge pipeline and we can't respond to all of them." When he started out in 2002, things were very different. "There were not many projects that we could invest in at the time. We used to get about two applications a month then. We are now getting an application a day."
Forming Networking Platforms and Communities
Rangsutra is a company that Aavishkaar supports. It has, within a year of being set up, established a small export market and a link with urban retailers such as FABIndia for the linen and hand embroidered clothes it makes. Says Sumita Ghose, "It is a difficult process, but we have learned to get out of the NGO mindset. Managing cash flows was a unique experience, but it has helped us focus and think our strategies through."
Another example is LabourNet. Run by Solomon J. P., it started out as an organization that looked after the rights of construction workers. It has evolved into a complete database of construction workers in and around Bangalore that links industry and laborers and facilitates training programs targeted at the construction workers. "We charge a fee from the company and the workers. We also offer our services to companies that want to train the workers, and that becomes a steady revenue stream." LabourNet helps the workers get medical and other workplace benefits and works with the companies to enhance productivity.
The network has tremendous community contact, which opens other doors. LabourNet has won contracts with Bosch to market the latter's tools to construction workers; with microfinance companies; and with a waterproofing company that wants construction workers to use its products. Says Solomon, "Workers get these products cheap because they are buying in bulk; the water-proofing company benefits as it gets bulk orders, and we get the funds to run our network."
The Individual Makes Way for the Organization
Most of these organizations are also developing professional management teams to run their daily operations. That is vastly different from the earlier NGO model of centralized decision making that was usually dependent on a charismatic founder or a committed charity organization. This is partly due to the nature of the projects being planned and the increased volume of funds flowing into the sector. Says Varun Sahni of Acumen, "We don't invest in an individual. We look for an organization." Acumen representatives are part of the beneficiary organization's management board and participate in the decision-making.
Professional participation is welcomed by people from within and outside the social sector. Says Karmayog's Somani, whose portal aims to connect NGOs with those who want to fund, help or seek their help, "We want to ensure that the NGO sector has access to trained and educated professionals." For instance, Karmayog has been working on civic issues in the city of Mumbai and has effectively used systematic networking between lawyers, academics and engineers to initiate dialogue between citizens and the local municipal corporation.
Several donor agencies are also driving NGOs to inject professional management approaches. Says Venkat Krishnan of GiveIndia, part of Give Foundation, "For us, the driving force is empowering both NGOs and donors. By allowing NGOs to state what they want support for, we are allowing them to focus on their missions and strategies the way they wish to. And by allowing donors to choose which projects they want to donate to, we are ensuring that there is an automatic 'market pressure' to encourage efficiency and effectiveness."
The Flip Side of Getting Business-like
While these are sound and logical arguments, there is of course a flip side. Professional management, scale and sustainability may well be the way to go for the social sector, but not all socially relevant projects lend themselves to a market-oriented rigor.
India does not have a social security network like many developed countries. It often falls upon the voluntary sector to look after the marginalized sections of society such as abused children and women, the poor, the mentally challenged and other underprivileged sections of society. Funds are hard to come by for these projects as they do not fit the new mold. The challenge going forward is for this segment of the social sector to redefine the rules.
How Aseema Seeks Business Success without Selling Its Soul
Dilbur Parakh remembers her first day at work vividly. It was 10 years ago, and it began with a walk down the streets of Bandra, one of Mumbai's more affluent suburbs. A lawyer by training, she had decided to work with the city's homeless children. Parakh's objective that morning was to survey the kids begging on the streets to find out why they were not at school. She wasn't sure how her day was going to turn out at the time, but in hindsight, it turned out rather well.
Parakh is the chairperson and trustee of Aseema, a non-governmental organization (NGO, a not-for-profit venture) that protects the human rights of underprivileged children. Aseema started out as an informal support center for street kids and has grown into a child rights' initiative that runs a municipal school, an activity center and a support center. It is also setting up a residential-center-cum-school at Igatpuri, a district in interior Maharashtra. Its reach and scale have multiplied during the past decade.
Aseema started out of a single room at a local school. It had a corpus of Rs 5,000, or a little more than $100; these were personal funds pooled in by Parakh and friends. Today, Aseema has adopted a school -- the Pali Chimbai Municipal School in Bandra, Mumbai. It spent Rs 12.8 lakh on the management of the school last year. It also runs two support centers and an activity center at a neighborhood school. Last year, Aseema managed donations worth Rs 36 lakh and the newly set up products division added Rs 3 lakh as revenue.
The organizational structure of Aseema has also changed over the years. In the beginning, it was an informal unit and its contact with the outside world was mostly through its donors. Parakh managed the center with a group of teachers while the trustees had an advisory role. Over the past year, Aseema has decentralised its decision-making process and hired professionals to manage its administrative functions and the product business. Phirooza Siganporia heads the products division, and the school and support center activities have been joined together under an education division.
Aseema regularly sets targets and monitors its projects closely. It maps them against the objectives and revises these if necessary. For instance, one of its projects was to develop tools and techniques to reduce the drop-out rate among its children. It has managed to do that with 100% of its children opting for a formal education. Another goal was to extend the Aseema model to rural education. A school-cum-residential shelter being developed at Igatpuri, a small town outside Mumbai, will help in achieving this goal.
Aseema has grown from a center with a dozen-odd children to one attended by 170 children. The Pali Chimbai School educates an additional 450 children. Although the scale may seem small given the huge requirements of the Indian education system, it has grown several times since its initial years. And growth has not affected its performance: Its children are staying on to complete their formal education, teacher training has ensured that more children are reading, and its focus on art has led to alliances with global organizations like Room13 of Scotland. Room13 builds art studios and sponsors an artist in residence in schools all over the world. Last year, it set up a Room13 at the Pali Chimbai School.
Several not-for-profit organizations in suburban Mumbai are also experimenting with similar models. Aseema, too, is adopting another school in rural Maharashtra. This will give it a wider play within the education sector. Aseema is also creating a sustainable revenue stream from its operations. It has set up a products division that retails products made from the artwork created by its children. The aim is to gradually reduce the dependence on donor funds. In this way, Aseema is developing a model that is scalable, replicable and sustainable.
Nearly 80% of the children who enrol into the formal education system do not complete their elementary education according to a study by Pratham, one of India's largest not-for-profit organizations in the education sector. The same study shows that 75% of Mumbai's school-going slum children cannot read at all. Set against these numbers, Aseema's achievements appear small. However size alone does not matter in this case. What the Aseema story demonstrates is the existence of a practical solution to a very large problem.
Another way to look at Aseema's growth is as Tejaswini Adhikari, a faculty member at the Tata Institute of Social Sciences, views it. According to her, the problem with urban Indian elementary education exists on three levels: the ambience, the teacher, and the community and children. During the past decade, NGOs have managed entry points at all three levels. Many are now developing those entry points into lasting infrastructure. Aseema is a case in point.
For these and many other reasons, the story of Aseema is an important one. It takes us through the life cycle of a charitable organization that has seen its operational and structural imperatives change even though the goal has not. It focuses light on the successes, problems and strategies that guide not-for-profit efforts in India.
Gravelstone Alley
In the beginning, there was no clear road, nor a destination in sight. There was only a problem that needed a solution.
Too many children begging on the streets seemed like a complete travesty of child rights to Parakh. When she surveyed the kids, she found that they had a huge desire to learn, but found no place within the mainstream education system. She decided to set up a learning center that would prepare these children for formal education, and Aseema was born as a charity under the Bombay Public Trusts Act.
Parakh spoke to the mothers, to the children and to the teachers. A lot of people came forward to help as, she says, "We all felt that the children needed a structured learning environment." Their lives were in a state of flux all the time and their learning environment had to be steady. Parakh approached a local school that agreed to let her use a classroom every evening for an hour. She spread the word around, and a teacher with one of the schools teamed up with her. A volunteer came forward from the slums and she agreed to bring the children to the center and take them back every evening.
It was a miraculous week, Parakh recalls. Help poured in from friends and strangers. On December 15, 1997, the first class was held. "We were taken by surprise by the number of children that turned up," says Parakh. There was a curiosity value to the program, and there were 18-20 kids in class that day.
After the first flush of excitement, however, the children started dropping out. Some found travelling to the center to be a chore. Others did not see the point, as progress was slow and laboured. Also, the children found it difficult to understand and apply the concepts being taught at the center.
This was a problem. The solution came from two unexpected sources. One was in the form of a biography of Maria Montessori that Parakh was reading at the time. It showed her a way to generate and retain the children's interest in the classroom. The second was an art teacher who would go on to lead Aseema on a unique development path.
The Montessori center was set up in a room at the municipal school that Aseema has since adopted. It took in pre-primary children and kept them until they were ready to go to a primary school. Shifting to the Montessori system helped immensely. Parakh says, "We found the children were able to read faster, were more disciplined and were able to apply their learning better." Today, the Pali Chimbai Municipal School runs a Montessori center and the system is being adapted for the higher classes, too. Aseema spends close to Rs 3.2 lakh a year on the Montessori center.
The new teaching methods helped stanch the drop out rates, as did the art classes that were started around the same time. Varsha Trivedi, an art teacher who had spent 20 years teaching in Mumbai's mainstream schools, teamed up with Parakh. One of the key functionaries at Aseema today, she says, "We believe that art is a great liberator. If we are able to teach it well, it will help the children." It definitely did. She worked hard with the children and soon they were turning their learning into stunning artwork. Their artwork found its way into an exhibition where it was completely sold out. When this happened at several exhibitions in a row, Aseema recognized an opportunity waiting to be tapped.
Art hooked the children too. It helped them stay in school and also lured dropouts back into the system. One example is Ramesh, a 12-year-old when he first came to Aseema. He had dropped out of school, but he loved art and he came for Trivedi's classes. Ramesh stayed on, and with the support of a volunteer at Aseema, finished school and trained himself in graphic design. He handles a lot of Aseema's organisational work today. Much of his artwork has also been converted into products. "Products empower the children," Parakh says -- it helps in building confidence and improving student retention. Products have also helped Aseema generate an independent revenue stream for itself.
Brick by Brick
Bill Drayton, founder of Ashoka: Innovators for the Public, a multinational social venture capital firm, once said, "People understand this field (not-for-profit) by anecdote rather than theory." The same is true for Aseema. In order to understand the way its products division has evolved over the years, it is best to start with an anecdote from the early days of Aseema's art classes.
During the first few classes, Trivedi found that the children were unable to draw on a large sheet of paper. They drew tiny figures and used the eraser several times over. They seemed intimidated by the size of the paper and were constantly erasing the work they did. Trivedi decided to give them crayons and introduced them to a technique called "scratch out," which did not ask for neatness in their work. The results were instant: Their work was bold, confident and unique. These paintings were all sold out at their first exhibition in Mumbai in September 1998.
What Trivedi and, in fact, the entire Aseema team has demonstrated time and again is operational flexibility. Aseema has adapted itself to the environment and learned from its mistakes -- just as it did when it found out that the first batch of greeting cards it produced had gone terribly wrong with its color combinations. Produced for Diwali, the Indian festival of lights, the cards were in shades of black and grey, colors considered inauspicious for a festival. "We salvaged the situation by printing more cards in orange, red and yellow and mixing them up with the black and grey cards to sell them as packs of 6 or 12", remembers Parakh.
The cards did sell out. And soon Aseema got more orders for cards, calendars, notebooks and other products. One of the city's largest business groups, the Ambanis, asked them to exhibit their products at their annual art shows. As word spread, demand grew and Aseema launched its product division.
The response gave Aseema the confidence to develop new products. During the past year, it has spent close to Rs 1.6 lakh on product development. Siganporia says, "We are treading very slowly, and results have been slow in coming. Breaking into the market has been difficult. Retail stores cut margins too thin and exhibitions, currently Aseema's main marketing initiative, are an expensive proposition. The product division will soon be an independent corporate entity, but we will take our time over it."
One of the options being explored by the team is setting up e-commerce facilities on Aseema's website. This option was suggested and developed into a business plan by students at the Wharton School and the S.P. Jain Institute of Management & Research in Mumbai. Aseema is in the process of implementing the plan, but as Siganporia cautions, "There are investments to be made, and since there is a constant tug on resources, e-commerce will be developed in phases over the years."
According to Therese Flaherty, director of the Wharton Small Business Development Center (SBDC), three Wharton undergraduate projects were closely connected with Aseema: Groups of ten students worked on understanding the U.S. potential for Aseema's products and on developing approaches that would allow Aseema to create a solid sales base in the U.S. for raising funds.
The students' projects were part of a required Wharton undergraduate course: Management 100: Leadership and Communication in Groups. The primary market research projects in this course provide each team of 10 students with a meaningful project which is challenging and requires the team to use the talents of all its members. During the process of executing the project, the team usually experiences the leadership and communication challenges that many self-managing professional teams face.
The Management 100 program provides the conceptual background and the coaching to help each team to succeed and to learn from the hands-on-experience in facing the challenges of teamwork. The program, which also teaches students to conduct their market research well, was developed by the director of the SBDC. The director guides three Wharton MBA candidates each year who act as SBDC advisors to the undergraduate teams and who follow the program to ensure that the teams provide useful market research to their small business clients. Also, to ensure that the teams learn the course content well enough to enable them to provide excellent work to their clients. "The marketing research instruction provided by the MBA SBDC advisors is a component of the course," adds Anne M. Greenhalgh, director of the Undergraduate Leadership Program.
"It is very unusual for a Management 100 team to have a client outside Pennsylvania, but because Knowledge@Wharton supported the team, their communication with Aseema and eventually their communication with MBA students in Mumbai, the three projects done by Management 100 for Aseema were highly successful learning experiences for Wharton undergrads," adds Flaherty.
Mapping a Course
Management wisdom has it that there are three executive archetypes of leadership: entrepreneurs, managers and leaders. In the not-for-profit sector in India, as in most parts of the world, leadership has been largely entrepreneurial. Leaders have been strong personalities and have led their teams on the strength of a vision and deep commitment to a cause.
This has been the case with Aseema too. Led by Parakh who has managed the center since its inception, it has grown around her vision. While this has been its strength, it can also become a weakness unless the organization recognizes the potential pitfall and takes steps to correct it.
Personality-led organizations have a high mortality rate and the scale of achievement is limited. Usha Rane, director-curriculum and program director for Maharashtra at the Pratham Resource Center, says, "We believe that the best models can be built but they cannot be replicated. You need to have people with their heart in the right place and that is a matter of chance." This is why, she says, Pratham chose to go with mass scale programs. "We see to it that it will appeal to all and is not dependant on experts in the field," she says.
Aseema has recognised the problem. In the past year a management team has been put in place to ensure that decision-making is not centralized. The organization has been divided into three broad functions: education, corporate and products. Responsibilities have been divided among the three division heads and the entire team meets every fortnight to measure and monitor performances.
The other problem that organizations like Aseema have to face is scalability. According to Adhikari, it resembles a typical 'end-in-itself' model. Its reach is limited to one or two schools. Rane believes that the Indian education system needs models that are far larger in their scope and reach. "We make sure that a program is started in at least 10 cities with at least a lakh children as beneficiaries," she says.
Aseema may not be able to scale up like Pratham. However, that may not be a weakness in this case for two reasons. One is Aseema's ability to get into a deeper and long lasting involvement with the child. And two, it is building in scale by developing a model that can be replicated by other not-for-profit organizations. As Parakh says, "Aseema believes in total involvement, and my dream is to take this involvement into rural India as well."
It would be simplistic to assume that the country's large education problem can be resolved by any one single model. There is space for many models and many initiatives. In the coming years, it is the efficiency, flexibility and sustainability of these organizations that will determine their success.
Why the Fight against Poverty Is Failing
Abraham George is the founder of The George Foundation, an NGO engaged in humanitarian work in India, and the author of India Untouched: The Forgotten Face of Rural Poverty. In this contrarian essay, he explores why the current strategies that governments and development agencies are employing to reduce poverty are not working the way they should. Among his arguments: Microcredit programs, as they are now practiced in India, do little to help the poor.
By the World Bank's broad definition of poverty ($2.00 or less a day per person), there are more poor people in the world today than a quarter century ago. Nearly half the world's population, over three billion people, lives in poverty. In India alone, two-thirds of its one billion-plus population is poor. Yet, the strategy for alleviating poverty across practically every developing nation has remained essentially the same for the past several decades.
There is plenty of talk about ways to increase income, reduce illiteracy and ill-health, and empower women. The increased attention given to these issues and pledges of additional financial assistance by world leaders are not matched by new and effective national initiatives that can significantly reduce poverty. So far, none of the poor countries has been able to achieve any of its key developmental targets. The emphasis is still on more funding for programs that have been in existence for many years. Yet these programs have had only marginal effect, and have not kept up with population increases.
My personal experience on developmental projects is confined to India, but the broader lessons learned there are applicable to most developing countries. What follows explains what I consider are misconceptions in the current approaches, and how the attack on global poverty can be far more successful.
International Development Assistance Hasn't Worked
The UN Millennium project argues that it is the poverty trap of poor health, poor education and poor infrastructure reinforcing each other rather than bad planning, corruption, and ineffective execution that is hindering development of poor countries. The idea is that underdeveloped nations can be saved through more outside assistance and by expanding existing programs that are run mostly by governments. Those who support this notion want the World Bank and other international agencies and donors to make increased contributions to supplement domestic government resources. But there is very little evidence that foreign assistance has made much difference in overcoming the poverty trap in any country.
As a consequence of the financial assistance received from international agencies, national governments rely on strategies developed by planners at organizations such as the World Bank and the United Nations. There is no shortage of ideas, enthusiasm, and expectations at the planning level, but what is lacking is good execution.
Planners have no responsibility for ensuring that funded projects meet their goals in the field. Other than requiring periodic written reports and demonstration of individual cases where success has been prearranged, there is little feedback or accountability. Beneficiaries are not in a position to let their views be known, nor do they understand what is expected in the longer run.
Misuse of Funds
Governments, international agencies and donors have spent billions of dollars to address poverty. For example, in rural India, the government spends significant funds on subsidies (for electricity, fertilizer, fuels, etc.), food rations, price supports, land allocation/distribution, job training and financial assistance for initiatives in agriculture and small businesses. Loans from the World Bank and other international agencies and bilateral aid supplement domestic government resources. But who has benefited from all these programs and assistance?
The beneficiaries are usually corrupt officials who manage and distribute funds, and landlords and powerbrokers who directly or indirectly extract benefits for themselves. In India, over 90% of the agricultural land is owned and partly cultivated by less than 10% of the rural population who are termed farmers; others are mostly laborers. Governments allocate land to the poor, but they are unable to utilize it because of limited water resources, bad soil conditions, and/or the inability to secure credit. Larger subsidies benefit bigger farmers, but the poor do not gain much directly from any government programs.
The presumption that with more money, corrupt and inefficient governments and bureaucratic institutions will utilize funds efficiently and improve the deplorable conditions of the poor is an illusion. There are too many impediments to poverty reduction: bribery, political influence in the allocation of land and/or credit, diffused focus and priorities, poor execution, a shortage of rural infrastructure, and social inequality, among other factors. Supporters of the "more money" approach should be reminded of what the late Indian Prime Minister Rajiv Gandhi once admitted: Less than 15 cents of each dollar in assistance intended for the poor finally gets to them. That is not to say that assistance should not be increased. But the real focus should be on ensuring that the allocated resources reach the poor.
Corruption and misallocation of development funds are ultimately the result of failed governance. Why bad governance? Unethical and illegal practices flourish in countries without free and independent press to investigate wrongful practices. Where the press is not sufficiently strong, there is little chance of preventing the "opportunistic behavior" of individuals, businesses and officials. Corruption can be reduced by assuring press freedom and strengthening private social institutions (such as advocacy groups) that stay independent. (Surprisingly, a democracy like India does not permit private radio stations to broadcast daily news!)
If citizens cannot rely on an impartial judicial system, there is little hope for a just and fair society. Societies that do not protect property and persone from predators cannot expect to create sufficient wealth for everyone. It is the erosion of press independence and the weakness of legal system that are most troubling.
The Limited Role of NGOs
There are several participants in the developmental arena: national and foreign governments, international agencies, private companies and non-governmental organizations (NGOs). The role of NGOs has gained attention in recent years as they focus on micro-issues and provide grass-roots assistance. Many have taken up projects to improve the quality of education and healthcare, while focusing on specific critical areas such as HIV/AIDS, illiteracy and women's empowerment.
NGOs have been advocates for the poor, pointing out issues of concern and presenting ideas for improvement, often figuring out how to press through the corrupt and self-serving regulations faced by their beneficiaries. Several are involved in income generation activities, offering microcredit or assisting with water resource management and use of indigenous technology. Some private companies have formed NGOs to attract grants from their governments and international agencies. These efforts usually complement those of governments in the implementation process.
Despite positive contributions, NGOs have not been involved in major developmental undertakings intended to create large employment and wide income generation through sustainable businesses. This is attributable to their lacking good managerial skills and organizational structure to take up business ventures. Further, donor funds are usually restricted to narrowly defined projects. Consequently, the role that NGOs are best suited to play is in support of projects funded by governments and international agencies, or those limited initiatives approved by private donors.
Unfortunately, those NGOs that actually carry out developmental work in the field are stuck within programs specified by planners in developmental agencies and donor institutions. New ideas that deviate from those already specified by planners seldom qualify for any funding. Thus, project proposals are prepared to reflect the requirements set by these planners in terms of methodology and outcomes. There is little initiative from the ground up, and no real feedback. Demonstrating compliance on paper ends up more important than actually getting the job done effectively. As a result, recipients of developmental funds spend significant time preparing reports for the planners to qualify for continued funding, and less time worrying about what benefits the poor.
Microfinance Is Not a Panacea
The expression "social entrepreneurship" was coined to reflect corporate benevolence toward the poor. Muhammad Yunus, who founded the Grameen Bank in Bangladesh in 1976, intended exactly that when he started giving poor people credit and assisting them in their local business ventures. Subsequently, many NGOs around the world started offering small loans to women who could otherwise not obtain credit from commercial banks. As different microcredit programs sprang up in poor countries, governments, international agencies and private donors joined in with necessary capital. Several experts in these institutions termed microcredit a revolutionary concept, and there is growing belief among many that it might be the way to solve poverty.
Today, some for-profit funds and supposedly not-for-profit organizations market microcredit lending in developing countries, and even offer advertised returns on investment. One such microcredit intermediary in India recently publicized that it has been charging 36% interest until recently, when it dropped the rate to 26% for some borrowers by making the lending process more efficient. After all, it argued, credit card companies charge as high as 28% interest for credit-risk customers.
The assumption is that poor people can be rescued quickly and easily with a modicum of money. (Microcredit is intended mainly for starting or expanding small businesses run by borrowers.) The claim is that microcredit (loans of around $100) has lifted tens of millions out of poverty in the developing world. However, assertions that more than 90% of the people who receive microcredit are poor, that most of them succeed in businesses started with these loans, and that they repay the loans at 24% annual interest or higher, go unchallenged.
So far, there has not been any outcry on the high rate of interest. The poor do not have any voice in, or understanding of, financial markets. They are happy to get loans to meet personal emergencies (such as expenses toward surgery, marriage or dowry) or to pay off financial obligations to local money lenders who charge even higher rates. Microcredit intermediaries claim that this is social entrepreneurship, and not living on the backs of the poor.
In my personal experience in rural India, I have observed that a small number of people, mostly village leaders and their family members, operate the few shops and businesses. They are the only ones who have the support mechanisms, knowledge, and skills to make a business succeed. A great majority of the poor rural populations do not have the ability or experience to start or run businesses, with or without access to credit. To expect them to succeed in business is unrealistic. They are uneducated and labor for landowners and for the few nearby businesses. At best, they might benefit from the trickle down effect if landlords and small businesses prosper.
The George Foundation is engaged in poverty alleviation projects in rural Tamil Nadu, India, focusing on income generation activities, education, healthcare and community development. The foundation has studied some 17 villages and over 50 microcredit programs in South India. Data show that less than 5% of those receiving micro-loans start any business of their own. One preferred activity is buying and selling sheep, hopefully at a profit equal to the wages foregone. These types of activities are unsustainable in the long run. Consequently, less than 2% continue beyond the first three years, and very few succeed in any such "business" with small amounts of money and little or no support, training, or skills.
Microcredit lenders are not concerned about what the borrowers do with their loans. Loans are usually made to individuals, but guaranteed by groups that can demonstrate their capacity to repay. Most borrowers of microcredit repay loans from income received at regular jobs, or from grants provided by governments for self-help programs. Not surprisingly, it is the intermediaries -- commercial banks and loan facilitators -- that gain the most from the spread between the cost of funds for the intermediaries and the loan interest charged by them. Commercial banks in India, for example, receive funds for microcredit programs from the government-run NABARD bank at 5% to 6%. They then lend at 10% to12% to a microcredit intermediary which, in turn, lends at 24% to 36% to the final borrower.
The assurance of loan repayment makes microcredit popular among lenders, in addition to the high interest charged. Borrowers are motivated to repay loans because of an expectation of future monetary benefits. If one borrows and repays twice (no need to start any business, but maintain good paperwork), then he/she becomes eligible for a grant for $100 or more from a separate government program (each state offers its own variation of this facility). The free money from the government can be used to repay the third micro-loan made to that beneficiary. The government is short the amount of the grant, but the borrower is debt free, and the microcredit middle man is assured of capital and high returns.
Why this round about way to offer free money when there are several direct means to reduce the debt burden of the poor? The answer probably lies in the fact that this form of "hand-out" is invisible within "social entrepreneurships". Moreover, major financial institutions have become embroiled in this commercial activity. A new breed of educated and well-trained loan sharks, with bank support, is now in the microcredit business in India. Microcredit has become a trendy cure-all. If poverty alleviation were a matter of lending, the world could eradicate poverty easily. It would cost about $300 billion at $100 per person -- a small sum in comparison to the trillions of dollars already expended over the past half a century. The present form of microcredit, as practiced in India, results in little or no sustainable development benefit for the poor.
Importance of Private Sector Participation
In developing countries, the government bears the primary responsibility for delivering basic services for the poor. It has traditionally been the agent for healthcare, education and job training, especially due to the inability of rural populations to pay for basic services. A significant portion of the costs associated with public services will continue to be borne by the state until rural incomes rise and/or until the private sector finds it attractive to be involved in such efforts.
Government-run institutions have, for the most part, failed to offer quality services because they are unable to motivate those who carry out the tasks in the field. Those who can afford to pay for quality services rely on private providers. Even those who work for government go to private clinics for their healthcare needs, and send their children to private schools. Quality will never improve unless service providers have the incentive to serve the poor. Until then, the "haves" have markets to choose from, while the "have-nots" have bureaucrats to dictate to them.
But, lack of affordability should not prohibit private sector participation. With NGOs as project facilitators, opportunities exist for public-private partnership. Private institutions can deliver services at reduced prices, but at a profit, within a competitive and independently monitored system where the costs are subsidized or even fully paid for by the government.
In developing countries there is no serious effort to involve private companies, though most rural areas are, in fact, ideally suited for industries in herbal products, alternate fuels, cement and tile, lumber and pulp, meat, dairy and poultry. These private industries should function in a free market with sufficient checks and balances to ensure that they operate in a socially and environmentally responsible manner. By offering job opportunities in villages, they would alleviate migration to cities for employment.
Financial incentives like low-interest loans and tax breaks, and physical infrastructure improvements will motivate private companies to build factories in rural areas. Elimination of controls on the sale of agricultural products, and assistance in finding new markets will attract many businesses. These measures will in turn improve the demand for produce and boost commodity prices to levels that can financially sustain rural families. Further, international agencies and donors must consider equity participation in companies instead of simply channeling funds through governments or offering grants. They should provide loans at low interest rates directly to local entrepreneurs who can demonstrate an ability to run successful businesses. In short, some of the available developmental funds must be used to support commercial activities in deprived communities. With more economic activity, the poor labor class can gain employment at better wages.
Government's role ought to be that of a catalyst. There should be no room for bribes. The focus should be to provide incentives for private (and community) participation. When private individuals and institutions find it worthwhile to take risks and invest in economically depressed areas, there will be sustainable development and poverty reduction. As incomes rise, there will be less need for government involvement in the delivery of many services currently provided.
It is not money alone but integrity and ideas that will make the real difference. A noted economist once asked me how I would go about improving the productivity of rural laborers on our farms. Creative thinking was my thought! We have instituted a program of de-worming drugs every six months, and daily iron tablets and protein-rich nutritional supplements prepared from locally available grains and nuts. Our workers wear wide hats protecting them from direct sunlight. These are simple, low cost measures, but they have contributed to a healthier and more productive labor force on our farms. For less than $10 per person a year, we have doubled their productivity!
A New Model for Corporate Philanthropy
Contrary to the recognized activities of NGOs, our foundation has embarked on a path similar to those of private organizations: We build institutions, develop human resources and managerial skills, and undertake major commercial projects -- for humanitarian reasons. One project currently underway is a 250-acre banana farm, the second largest in South India. My life-long experience in business, my convictions about free and open markets and the need to encourage an entrepreneurial spirit in the individual have helped me not to rely on donor funds alone. Instead, our foundation has invested in sustainable projects that generate "profits" as well as steady income for the poor.
Our decision to confine business activities to farming results from the fact that the rural adult population in India is generally illiterate and lacks industrial skills. It is farming that gives them opportunities to better their lives; it is what villagers have a natural affinity for; and it is an industry where large numbers can be employed.
With the goal of empowering poor women and elevating their income-generating capacity, The George Foundation set up Baldev Farms, a "learn while you earn" program. The farm uses precision agricultural tools, organic fertilizers and superior technology in drip irrigation to conserve water. Apart from the farm workers' daily wages, we set a portion of the profits generated from the sale of produce in a savings account to be used at the end of five years for the purchase of one third to one half acre of land for each family. Families will then cultivate their newly purchased land, sharing resources, such as wells and tractors. The foundation will remain a support organization to help address concerns and difficulties, while also offering know-how and access to markets.
Within three years of starting Baldev Farms, more than 150 villagers, mostly women, have found labor and supervisory employment in the field; hundreds of others have benefited indirectly. Most have already come out of poverty, paid off their debt and freed themselves from bonded labor status. As the foundation expands its farming activity in high-value fruits and vegetables, it will soon generate sufficient cash flow to finance other humanitarian initiatives.
Though the final chapter on this program is not yet written, the concept of offering each poor family a piece of the land to cultivate profitable crops is proving to be sound. With the profit sharing plan in place, everyone in our farm is highly motivated, takes initiatives and works hard. It is becoming increasingly clear to us that good management and a dedicated work force are assuring profitability to empower the poor.
Admittedly, our "corporate" approach to philanthropy cannot be replicated by most NGOs. Only private for-profit companies have skill bases and resources to undertake such business ventures. But they must recognize that market opportunities can be tapped only when the purchasing power of consumers rises. Hence, for the foreseeable future, investment in the rural sector ought to be toward production as opposed to selling to the "bottom of the pyramid." In the longer run, it is competitive markets and involvement of the community in sustainable development projects that will solve poverty.
As long as significant poverty exists around the world, and the disparity between the rich and the poor widens, private companies in developing countries need to make a contribution to solving the problem. A dialogue must begin between and among business leaders on devising rules for business conduct in deprived communities. The model must consider how poor people can be brought into the mainstream of consumers with sufficient purchasing power within a reasonable time period. Those who work must earn enough to be able to come out of poverty. Minimum wages and benefits must be adequate to meet at least basic human needs, and farmers must be able to sell their crops at prices that assure a fair net gain. Economic success and social justice must go hand in hand.
There is serious concern in many circles, and rightly so, about whether the private sector can be trusted to operate fairly in communities that are poor. The fear is that free markets mean exploitation, citing what they call the "Wal-Mart Syndrome" of forcing suppliers, especially those from poor countries, to offer products at prices that leave little gain for workers.
Troubling issues like this one will always exist. But they can be addressed through effective enforcement of laws and regulations concerning minimum wages, worker safety and benefits, non-competitive practices and environmental protection. Private companies must resist the temptation to extract government funds for their business activities in the name of social entrepreneurship. They must recognize that it is in their long-term interest to win the support of the communities where they operate. Repressive local norms in compensation and treatment of labor must be replaced with fair practices that assist the poor in adequately caring for their families. Market forces of supply and demand and competition for gaining a dedicated labor force and loyal consumers are powerful factors in motivating good behavior on the part of corporations.
There are no easy answers. Poverty, in large part, can be solved if the poor gain new skills and if more jobs become available in the rural sector. For some, the solution lies in ownership of a permanent income generating asset: land. The poor need to have the opportunity to own and develop land, and grow profitable crops that can be sold in a competitive market.
More money is not a prerequisite for success; proper use of available funds is. There is no substitute for good planning, effective organization and execution with accountability. Only those who bear financial risk can be expected to perform effectively.
Handouts will not solve poverty; neither will it be solved by grand government projects, or by piecemeal interventions of NGOs. Instead, poverty will be solved with vibrant economic activity driven mostly by the private sector. The hundreds of millions of new jobs that are needed each year will come mainly from corporate business ventures in rural areas. The developmental strategy to address poverty must embrace this reality.
A market-based approach to poverty reduction will result in income and wealth creation, and lay the groundwork for the next generation to avail of a wider range of opportunities with enhanced resources.
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