Poverty reduction vs. wealth creation

“Haute empowers entrepreneurs in Africa to grow their businesses and create jobs by providing them with management training and consulting services.”

Haute’s mission statement might sound a little strange to you.  Most charities operating in Africa focus on well-recognized activities like digging wells or providing people with mosquito nets.  So why doesn’t Haute engage in these “standard” activities?  It’s because Haute focuses on wealth creation rather than poverty reduction.  And - unfortunately for Africa – poverty reduction programs abound, while wealth creation programs are scarce.

Poverty reduction programs are aimed at treating the symptoms of poverty (see my post “Symptoms vs. causes”), and usually involve hand-outs of physical objects such as money, goats, wells, food, clothing, etc.  These well-intentioned hand-outs do a great job of reducing suffering in the short term but do not build the capacity of their recipients.  For this reason, when the hand-outs stop, the benefits of the programs stop. 

Wealth creation initiatives, on the other hand, address the root cause of poverty by building peoples’ capacity to start, lead or participate in viable businesses (again, see my post “Symptoms vs. causes”).  These initiatives empower people to take control of their own lives in a dignified manner.  They reduce unemployment and under-employment, and increase tax revenues.  Wealth creation is the only sustainable solution to ending poverty.  Think about it… do you know anyone that has become independent and successful by receiving hand-outs from charity?

Andre Mwenda, a Ugandan journalist, does a great job of highlighting the differences between wealth creation and poverty reduction in this 2007 TED Talk.

[From the TED website] In this provocative talk, journalist Andrew Mwenda asks us to reframe the "African question" -- to look beyond the media's stories of poverty, civil war and helplessness and see the opportunities for creating wealth and happiness throughout the continent. Andrew has spent his career fighting for free speech and economic empowerment throughout Africa. He argues that aid makes objects of the poor -- they become passive recipients of charity rather than active participants in their own economic betterment.

Getting to know Konan & Kouadio

For many of our readers, it is difficult to imagine what everyday life is like in Africa.  There are an abundance of images on TV and stories in the newspaper, but these are difficult to weave together into an understanding of the realities of daily life on this vast continent.

I was therefore excited to find the BBC News article below, which presents the lives of two men – Konan Vercruysses and Kouadio Koffi – who live in Abidjan, the largest city in Ivory Coast (West Africa).  Konan manages a phone box (read the article for a definition) and earns about $20 a day.  Kouadio works as a third shift security guard and earns around $2 a day.  

The article shows how they spend their money each month, but also goes into detail on their hopes and dreams:

Konan: “I just want to live alone to be a man, to face the difficulties by myself and be independent.”  “I don't like the word poor because if you have this in your mind it brings you down.  I'm convinced I will be rich one day. I would like to reach my goals.”

Kouadio: “There are many challenges. I want to see a better life, a better life for me.  I want to have a wife and children but what food can I give them?  I need money to give them a life and send them to school. I don't want them to suffer.  When life is better for me I can have a family.”

The reality is that Konan and Kouadio are just like you and me… they just happen to have been born in Africa, while we happen to have been born here.

Please click on the link below to read the full story!

BBC News: What is middle class in Ivory Coast? (25 June, 2013)

How much goes to administration?

When deciding whether or not to donate to a nonprofit, many potential donors ask “How much of my donation goes to administration?”  While well-intentioned, there are two fundamental problems with this question.

1.    It focuses on activity rather than results.  When you have asked your son to mow the yard, you don’t later ask him “How much of your time today was spent mowing the yard?”  Instead, you ask him “Did you get the yard mowed?”  The first question is about activity, and the second question is about results.  For some reason, the nonprofit sector is allowed to be judged on activity, whereas all other businesses are judged by the results they produce.    

To demonstrate this point, please consider the following two scenarios.  Remember: Haute’s key metric is the number of new jobs that our clients have created after benefiting from our management training and consulting services.

A.    Haute raises $20,000 from donors.  It spends $10,000 on management training and consulting services for new clients, who then use their new knowledge and skills to grow their businesses and create 150 new jobs.

B.    Haute’s raises $20,000 from donors.  It spends $15,000 on management training and consulting services for new clients, who then use their new knowledge and skills to grow their businesses and create 100 new jobs.

Which of these two scenarios is the best use of donor funds? 

Well, if we use the “% to administration” criteria, then scenario B is the best, as only 25% goes to administration, vs. 50% going to administration in scenario A.  But what if we focus on results rather than activity?  In scenario A, $20,000 resulted in 150 new jobs, meaning that is takes $133 to create one new job.  In scenario B, $20,000 resulted in 100 new jobs, meaning that is takes $200 to create one new job.  Scenario B is now clearly shown to be a waste of donor funds, even though the “% to administration” test results in the opposite conclusion. 

2.    It greatly restricts the nonprofit’s ability to expand its impact.  Dan Pallotta does a great job of explaining this point, so I’ll leave it to him.

Dead Aid

In our previous post, Ernesto Sirolli made reference to Dambisa Moyo’s book Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for Africa¹. 

Dambisa was born and raised in Lusaka, Zambia, in Southern Africa.  She holds degrees from Oxford and Harvard, and has work experience with Goldman Sachs and the World Bank.  Her background, education and work experience came together in Dead Aid to produce a highly-acclaimed book that challenges the way many of us implicitly think about aid in Africa.

In her book, she points out that over the past sixty years, more than $1 trillion in aid has poured into Africa, with little positive impact.  She then goes on to state “Were aid simply innocuous – just not doing what it claimed it would do – this book would not have been written.  The problem is that aid is not benign – it’s malignant.  No longer part of the potential solution, it’s part of the problem – in fact aid is the problem” (Moyo, 2009, pg 47).

For those that are interested in learning more about Dambisa’s point of view and her proposed solutions, you can pick up a copy of the latest edition of Dead Aid on Amazon by clicking here. 

Or if you are more pressed for time, you can check out Dambisa’s 2009 Wall Street Journal article “Why Foreign Aid is Hurting Africa”² by clicking here.

References
1 Moyo, D. (2009). Dead Aid: Why Aid Makes Things Worse and How There Is Another Way for Africa. New York, NY: Farrar, Straus and Giroux.

2 Moyo, D. (2009, March 21). Why Foreign Aid is Hurting Africa.  The Wall Street Journal. Retrieved from http://online.wsj.com

Empowering clients

Haute’s elevator pitch is:

“Haute empowers entrepreneurs in Africa by providing them with management training and consulting services.  Since 2007, Haute has worked with 195 clients, who have used the knowledge and skills gained from our services to grow their businesses and create over 300 new jobs in Africa.”

Two key concepts are embedded in this statement:

1.    Empowering.  We only work with existing business owners.  If you are an existing business owner, you already have a passion for your business and are trying to grow it.  We aren’t in the business of convincing anyone to be an entrepreneur that isn’t one already.  We are only in the business of empowering people to do what they are already trying to do.  Haute hasn’t grown any businesses or created any jobs in Africa – our clients have. 

2.    Clients.  We only have “clients”.  We do not have “recipients” or “beneficiaries”, as many other nonprofits do.  A management training or consulting company here in the US (e.g. McKinsey, Booz) has clients – and not recipients or beneficiaries – so why would Haute be any different?  After all, our clients are highly intelligent and often masters of their specific trade.  We ask our clients for feedback on how to improve our services, and our entire consulting process is built around listening to them and helping them to achieve their business goals.  We don’t degrade our clients by acting like we know what is best for them. 

Given Haute’s approach, we found the TED Talk below by Ernesto Sirolli to be spot-on.  It’s 18 minutes long and is insightful but also quite entertaining.  Enjoy!

Symptoms vs. causes

In the medical field, there is a clear distinction between the symptoms of a disease and its causes.  Take malaria, for example.  The symptoms of this disease tend to include headache, joint pain and dramatic swings in body temperature that cause shivering and sweating.  These symptoms – especially the last one – are "how you know malaria when you see it". 

The cause of malaria, however, is the presence of malaria parasites in the liver that then invade the blood stream.  Or, if you want to a step backwards, the cause of malaria is being bitten by a mosquito carrying malaria parasites. 

In order to cure someone of malaria, the parasites in the infected person's liver and blood must be killed.  We could never cure a patient just by treating the symptoms of malaria.  Giving ibuprofen to a patient would help reduce their headache and joint pain, but they would still have malaria.

Now let's have a look at poverty.  What are the symptoms of poverty?  How do you know poverty when you see it?  Well, the most common symptoms are a lack of food, clothing, shelter, healthcare, and other basic goods and services that make life longer and more comfortable.  We can and should treat these symptoms in order to make the impoverished more comfortable.  Instead of ibuprofen, these symptoms are treated by relief services that supply food, clothing, shelter, etc.  Relief services are essential, but they do not treat the causes of poverty.  After receiving the much needed goods and services, the recipients are still poor.

What, then, are the causes of poverty?  To be sure, there are many.  Let's start by asking where people in "developed" regions get their food, clothing, shelter, etc.  Let's take food as an example.  Most of mine comes from Walmart.  Where does Walmart get food?  From distributors of food or directly from farmers.  Notice that all these - Walmart, distributors, and farmers - are all businesses.  As a matter of fact, all the goods and services that are missing in impoverished regions are supplied by businesses in developed regions. 

The Business is, in my opinion, the most amazing and un-celebrated of human inventions.  Businesses provide us with the goods and services we need to make life longer and more comfortable, and it also pays us a salary or wages in order to buy these things. 

Take a moment and look around you.  Most, if not all, of the things you can see were provided or placed there by a business.

One of the most significant causes of poverty is a lack of viable businesses, or, more precisely, the lack of skills required to start, lead or participate in a viable business.

If a person has the ability to start, lead or participate in a viable business, and that person does not have a job, then they are merely unemployed.  If a person does not have the ability to start, lead, or participate in a viable business, then that person is poor.

Sounds simple, but it's true.