The Problem of Inflation in Ethiopia

I have spent a bunch of hours over the last two weeks working on preparing a budget proposal for the Children’s Home in Soddo for the 2013 budget.  While the problem of inflation has certainly not been new to me in Ethiopia, over these past two weeks I’ve been painfully reminded of the challenges it presents for average Ethiopians and for small charities and NGOs operating in Ethiopia.  For foreigners, the inflation has certainly been visible, but not necessarily felt.  When converting to USD, items domestically produced in Ethiopia have always been very affordable (imported items are a very different story; automobiles, for example, are about 4 to 5 times the cost that they would be in the U.S, because of import shipping costs and duty, which can be upwards of 200% on top of the value of the vehicle). In addition, a large portion of the inflation over the last 8 years has been absorbed for foreigners by the devaluing of the Ethiopia currency (the Birr, usually represented as ETB) against the US dollar (USD). Ethiopians, however, have experienced the full brunt of the massive inflation of the past 8 years, and, as I was reminded the last couple of weeks, this inflation has created a great challenge for small charities and NGOs trying to operate in Ethiopia.

Just since 2010, the annual budget for the Children’s Home in Soddo has nearly tripled (it is up 278%) when looked at in Ethiopian Birr.  Some of this increase is because the organization has increased in size and scope during those 3 years.  We now have more kids than we did in 2010, and we have increased some of the staff since 2010.  In addition, there have been legal requirements added for alternative childcare institutions and NGOs since 2010, which require extra funding for reporting, documentation, monitoring and evaluation.  With these organizational increases aside, however, most of the budget increase since 2010 has actually been due purely to inflation.  According to inflation measurements by the World Bank, a basket of goods that would have cost 100 ETB in Jan. 2005, would have cost 223 ETB in Jan. 2010 and will cost 450 ETB by Jan. 2013.  That’s inflation of 450% since 2005 and just over 100% just since 2010.

During this same stretch of time, there has also been considerable devaluation of the Ethiopia Birr against the US dollar, so, for an organization that receives funding in US dollars, a good chunk of the inflation has been absorbed by the increased value of the dollar against the birr.  But, this currency devaluation has not come close to covering the full blow of inflation.  For example, in 2005 the exchange rate from ETB – USD was 8 – 1, so that basket of goods that cost 100 ETB would have cost $12.50 in US dollars.  The exchange rate now is 18.2 – 1, so that same basket of goods, which now costs 450 ETB, would be $24.73 in US dollars.  So, even when prices are pegged to the US dollar, inflation since 2005 has been nearly 100%, and just since 2010, it has been 45%.  This is the primary contributor to the increase in the budget for the CCC Home even in dollars. In dollars the budget for the home has increased by 80% since 2010.  As mentioned before, some of this is simply because of organizational growth and some structural changes, but more than half of this increase is because of inflation.

This inflation has made it increasingly challenging to raise the necessary funds to keep the Children’s Home funded properly.  The primary mode of funding the home is through sponsors in the US.  Sponsors are paired with a specific child at the home in Soddo and contribute a certain amount monthly.  It has been impossible, however, to annually increase the amounts expected from sponsors in order to keep up with inflation in Ethiopia.  As a result, every year, a larger percentage of the overall budget must be raised through special fund-raising apart from the sponsorship program.  By budget-year 2013, over 30% of the annual budget will need to be raised by special fund-raising beyond the sponsorship program.

Ethiopia claims that despite the massive inflation over the last 8 years, the growing economy has produced net benefits for the country.  It is true that Ethiopia has had strong economic growth in recent years.  Despite the economic downturn in much of the world, Ethiopia has averaged 10% GDP growth per year since 2004.  The effects are visible everywhere in the country.  There is a mind-blowing amount of construction, for example, happening everywhere; construction of housing, high-rise buildings, hotels, roads, dams, railways, etc.  Though the new wealth generated by the growth has been very unevenly enjoyed, the growth does seem to be helping to lift Ethiopia out of absolute poverty.  Ethiopia is one of the few countries in the world that appears to be on target to meet the Millennium Development Goals of reducing extreme poverty, decreasing child mortality, etc.  Ethiopia claims to have reduced absolute poverty from about 36% of the population in 2005 to below 29% by 2013 and seems to be on track to reduce that further to the goal of 21% by 2015 (these figures depend on from what source one gets his information).

(Based on one study that I was able to find with 2010-11 data, the absolute food poverty line in Ethiopia was determined by the min. amount necessary per adult per year to sustain a 2200 calorie / day diet (this does not account for any other expenses, such as those related to shelter, clothing, transport, etc.).  This number was 1985 ETB / year, which would have been about $140 / year based on the 2010-11 average exchange rate.  This particular study determined that in 2010-11, 29.6% of the population was below this absolute food poverty line.  Though I have not been able to find specific statistics, the Ethiopian government claims that since 2010-11, this below absolute poverty rate has decreased and it claims to be on track to reach its goal of decreasing this percentage to 21% by 2015).

Despite this reduction of absolute poverty, inflation has definitely hurt a large portion of the population.  While government expenditures in improved infrastructure, such as irrigation, clean drinking water, roads and access to markets, has reduced the number of people in Ethiopia who are unable to feed themselves, there is a large segment of the population, that segment just above absolute poverty, that segment who live off of low-wage jobs, whose living standards have decreased as a result of inflation.

This has, unfortunately, been the experience for many of the low-wage staff who work at the Children’s Home, despite our best efforts to give annual raises that are in keeping with raises that organizations like ours are giving.  For example, one of the guards that works at the Children’s Home, the most senior of the guards based on his years of experience, was making 498 ETB / month in 2010, which was the equivalent of $38.30 / month based on the 2010 exchange rate.  This was a reasonable wage for a guard.  Guard work is considered unskilled, low-wage labor, often for older men who have had little to no education.  For this guard in 2010, however, this monthly wage, supplemented by his small-plot garden and his few animals, allowed him to live and support his family.  If his wage had kept pace with inflation (45% when using USD), he should be making the ETB equivalent of $55.50 in 2013 (1010 ETB).  In other words, it would require the ETB equivalent of $55.50 / month in 2013 to ensure that our guard had the same purchasing power as he had with his $38.30 / month in 2010.  Instead, despite getting a raise (based on ETB) of 25% in 2011, 10% in 2012 and another 10% in 2013, this guard is now only making the ETB equivalent of $41 / month, which means that his real wages have decreased by $14.50 / month.  In other words, because of inflation, and despite of annual raises, our guard in 2013 is only making 74% of what he was making in 2010.  This same story is true for our other guard and our kitchen staff, who are now making less in real wages than they were in 2010 despite receiving annual raises.  This is the story of millions of low-wage earning Ethiopians across the country.

So the story of Ethiopia’s boom times in the last decade is very mixed.  There is no question that there is an increase of wealth in the country.  There is a new class of people living in Addis who are making lots of money, living in large luxury homes, driving luxury SUVs and enjoying expensive new leisure activities.  There is new business and investment in Ethiopia.  The hotel industry alone in Addis has exploded, with the construction of at least a half dozen high-end hotels in the city just in the last 5 years.  The statistics seem to also show that there is a segment of the population on the very bottom, the absolute poor, who have also benefited to some degree.  This is true at least to the point that the percentage of the population considered in absolute poverty has been decreasing.  But between these two extremes on either end of the spectrum, most Ethiopians will say that their lives have become more difficult and their standards of living have declined in the last 8 years.  This is the part of story that often isn’t reflected by the nation-wide economic statistics and this is the story that I’ve been painfully reminded of during the last couple of weeks.

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Social Entrepreneurship

This post is about a recent curiosity of mine that I’m both intrigued by and discomforted by at the same time.  I came upon the concept of social entrepreneurship after someone suggested I look at the work of an organization called iDE and at a recent book written by its founder, Paul Polak (more about Paul Polak and iDE below).  Please note that I am in no way an expert on this topic.  What is written below is by no means a fully thought out or researched analysis.  I submit this mostly just to generate some discussion and learn more myself.  Please feel free to correct any of my misunderstandings and further educate me.

Attempt at a Definition

The term social entrepreneurship seems to be a broad term that gets attached to a wide variety of enterprises.  There are those who claim to be doing social entrepreneurship through not-for-profits and NGOs, while on the other end, there are those who insist that social entrepreneurship has to be attached, from top to bottom, to the pure laws of the market.  There are some involved in social entrepreneurship more as a means to an end, while there are others who pursue it ideologically, as market enthusiasts.  The first group sees small business as a practical means of income for populations that otherwise have no means to financially support themselves.  The later view social entrepreneurship as an example of how the rationale of the market can solve social problems and address poverty on a broad scale.

By my understanding, a social entrepreneur is defined as someone using business to address a social problem.  Of course, the broad range of what can be considered a social problem is part of why the term is so vast and vague.  To narrow our discussion somewhat, let’s stick to the context that has given rise to my curiosity about the topic, which is as a means of addressing issues of poverty in developing countries (the term developing countries is problematic, but I use it here out of lack for a better term).

A Couple of Examples

It may help to better understand social entrepreneurship if I provide a couple of examples of social entrepreneurs who are addressing the social issues of poverty in developing countries.

Example 1:  Nobel Peace Prize winner, Muhammed Yunas , founder of Grameen Bank in Bangladesh is considered the father of the micro-credit movement.  He saw a social problem.  He saw that the poor of his country did not have access to capital with which to start or expand small businesses to provide for and improve their livelihoods.  He saw this as a sort of “poverty trap” (to use Jeffery Sachs’ term; see The End of Poverty: Economic Possibilities for Our Time).  Those with money, because they had money, could get access to credit from banks in order to make more money.  Meanwhile, those without money could not get access to credit.  With few other job opportunities through which to move out of absolute poverty and without access to credit to start their own small business enterprise, they were trapped in poverty (absolute poverty is defined as living on less than $1 USD / day / person, which in 2001, according to World Bank stats, included about 1.1 billion of the world’s people).  So Mohammad Yunas established Grameen Bank and launched the idea of micro-lending to the poor.

Grameen Bank is set up as a normal bank, a self-sustaining, profit-making financial business (though apparently there is controversy about its self-sustainability because of its partnership with the Bangladesh Central Bank).  It is a for-profit business, but one established for the purpose of addressing a social problem.  It is a business that, according to proponents, has done great practical social good.  By providing needed capital funds to poor individuals and families, Grameen Bank has helped people move out of absolute poverty to a financial position where they are able to provide for their livelihood and that of their families.  Beyond just meeting basic needs, with increased income, people are empowered to invest in areas that improve their lives, their families and their communities.

Grameen Bank is not the only model of micro-lending.  Grameen Bank is set up on a business model, as a bank.  Unlike Grameen Bank, there are also not-for-profits, NGOs and even community savings cooperatives working with micro-lending.  In these cases, the funds are initially provided through donors, foundations, or from contributions from cooperative participants (rather than through investors).  In these cases, the lending organization is using micro-lending as a means to empower poor people to lift themselves out of absolute poverty, but without the concern about the business purity of their model or the business sustainability or profitability of their lending program.

On a quick side note, there are critics of micro-lending.  There have been examples where micro-lending has veered into predatory lending; where micro-lending institutions have strapped individuals, families or communities with high-interest depth that they simply can’t repay.  In some cases, people have become worse off because of dept incurred from a micro-lending institution.  There are also questions about the success statistics of micro-lending.  To what degree does micro-lending truly help people rise out of poverty.  There are many examples of borrowers using a micro-loan to finance a wedding, a funeral or some other form of one-time expense.  In these cases, the micro-loan may have served a purpose, but does not actually result in increased income and improved livelihood for the borrower.

Example 2:  My second example is that of Paul Polak, founder of an organization called iDE (International Development Enterprises).  He is also the author of a recent book called Out of Poverty:  What Works When Traditional Approaches Fail.  iDE was established to develop and market products to poor, sustenance farmers; products that were developed explicitly with a price-point in mind that small, poor farmers could afford (think: ¼ – ½ acre, hand-worked, non-mechanized, family farms without access to high-yield seed varieties nor fertilizers beyond what is provided by their own animal or two).  These are products that can help small, poor farmers increase production on their small plot farms and thereby increase their income and better their livelihoods.

One product example developed and marketed by iDE is drip irrigation.  At the simplest level, iDE has developed a drip irrigation system, attached to a 40 or so liter, elevated barrel, and gravity fed to irrigate a small garden plot.  iDE’s philosophy is that a poor farmer, dependent on rain to grow crops, if he/she can carry enough water to fill that 40 liter barrel each day, can grow a small plot of high cash value crop in the dry season during a time of scarcity and high market price using a small, cheap, drip irrigation system (iDE’s gravity fed system costs about $25 USD per a 1/3 acre and can be easily scaled up to cover larger plots).  With the cash they can make off a drip irrigation-grown cash crop, a small farmer can improve his/her livelihood and the life of his/her family.

iDE’s model is to not give away or subsidize the products that they’ve developed, but to set up a supply chain through new or already existing manufacturers and businesses.  This way small shops in the small towns where rural farmers come to sell their produce can benefit by manufacturing or selling an in-demand product at the same time as farmers benefit from purchasing a product that helps them increase their production and therefore their livelihood. With even slight increases in income, iDE has found that poor families invest in improved diet and therefore improve their health.  They invest in education for their children because they can afford uniforms and school supplies.  Of course, they also invest in further improvements to their farm or business so as to further increase their incomes in the future.

Unlike Grameen Bank, iDE itself is not a business.  It is set up as a not-for-profit corporation.   Its goal is to help small business operators (including small farmers) improve their ability to make money.  They work to develop and market products that solve problems for small farmers.  They work to train farmers and technicians with their products.  They work to help farmers and small business owners gain better access to markets.  But iDE itself relies partly on funds it receives from grants and donors to implement its projects and does not have its own profitability as an organizational goal.

My Misgivings

As mentioned at the outset, my curiosity about social entrepreneurship comes with some serious misgivings.  Here is a quick summary of some of my concerns:

  1. I have been and continue to be a strong critic of capitalism.  If I had lived in the U.S. during the past year, I would have been an active supporter of the “Occupy Wall Street” movement because I believe that the unbridle capitalism of the U.S. has had disastrous effects on American society and the global community.  At the very heart of the capitalist system is the principle of self-interest and the drive for increased profit.  I see a serious contradiction between capitalist self-interest and the goal of addressing the social problem of poverty in developing countries.  I believe there are good intentioned individuals who have and can use business in a selfless way to improve the lives of others, but as a general, broadly applied principle, I question whether the business goal of personal profit can exist alongside the goal of addressing poverty.  Perhaps this contradiction can be mitigated when social entrepreneurship is practiced by the social entrepreneur under the banner of a not-for-profit such as with the example of iDE.  Otherwise, I am uncomfortable with the idea of business entrepreneurs in the developed world profiting off of the poor in developing countries.
  2. Many advocates of social entrepreneurship are market enthusiasts.  Paul Polak, for example, though iDE operates as a not-for-profit, believes that that best way to address poverty is through the natural workings of the market.  He is strongly against subsidies or providing products at below market value.  While I have witnessed some of the disastrous economic consequences of government price controls, or development organizations broadly giving items away or providing goods at great subsidy, I don’t hold to the same enthusiasm about the natural market as many social entrepreneurs.  Even iDE depends on grants from large foundations and donor agencies (such as the Bill and Melinda Gates Foundation) to develop its products and implement its programs.  There is a reason why large irrigation companies have never developed systems affordable and useable for poor, ¼ acre or less farmers in developing countries.  The natural market principle is about developing and selling products for the purpose of maximizing profits and the natural market doesn’t believe that the world’s poorest are a profitable market.
  3. There are many advocates of social entrepreneurship who see the enterprises of big businesses and multinational corporations as holding potential for addressing issues of poverty in the world.  While I can concede that smaller business enterprises can practically function for the genuine good of others simply through the personal humanity and morals of the business owners and operators, I cannot concede that large corporations, beholden to share holders and investors who want to see constant growth and increased profits, can positively address the issues of poverty in the world.  A large multinational apparel company like Wal-mart, for example, can certainly set up clothing production in China or Bangladesh and provide jobs, but I have to question the motive.  Would a company like Wal-mart make such a move for the purpose of helping the population of Bangladesh pull itself out of poverty, or would it make such a move just to exploit cheap labor and increase its own profits?  Can one really say that the net effects of these kinds of corporate profit-driven decisions have a positive result on addressing the social problems of the world?

But I’m Still Intrigued:

Despite these misgivings, m curiosity continues, particularly as it relates to our work here in Ethiopia.  Here are a few reasons why I think there could be something to this idea:

  1. The longer I spend time in Ethiopia and think about the on-the-ground issues of poverty on the local level, the more I become a believer in practical, local solutions.  Maybe it doesn’t matter if an idea can work on a global scale.  Maybe it doesn’t matter if an idea can address poverty everywhere.  Too often macro-solutions fail because they don’t account for the particularities of local situations.  Maybe we don’t need a macro-solution, or a new political-economic philosophy.  Maybe we need a bunch of micro-solutions that actually work.  Despite some of the larger macro-implications that Paul Polak discusses in his book (many of which I’m uncomfortable with because of his enthusiasm for the market as a global solution to poverty), when I look at the micro-level of what iDE is actually doing with small, poor farmers in places like Ethiopia, I can’t deny that their approach is helping.  They are empowering small farmers to increase their personal income and thereby improve their lives, the livelihoods of their families and their communities.
  2. Part of our work here in Ethiopia is to help our kids figure out ways to thrive as independent adults in the future.  Part of this independence depends on our kids’ abilities to eventually support themselves financially.  These are kids who have grown up or will grow up in an orphanage, kids you have no or limited family connections, kids disconnected from a community, and kids who will never inherit land.  Our area of the country is deeply dependent on small, sustenance agriculture.  There is really no other industry.  Unless one gets a job as a civil servant in a government department, there are few other job options available.  Most people exist off of some form of official or unofficial micro business.  This micro business may be their small family farm, a small vegetable stand, a small hardware supply shop, a café, or a tea and bread stand.  This micro business may be driving people on a motorcycle for a fare or it may be selling some handcrafted items or used plastic bottles in the Saturday open market.  This micro business may just be an individual contracting out his/her labor to carry items for others, push a wheelbarrow, or dig a ditch.  Some of our kids will succeed with education and acquire a decent-paying civil servant job in the future, but many of our kids will have to financially survive as entrepreneurs of sorts.  Because of this, I see great value in micro-lending organizations and organizations working to help people start, develop or increase income off of small businesses.  These are efforts that can genuinely help people lift out of absolute poverty and financially sustain themselves.
  3. One of the great benefits of micro-lending and the work of organizations like iDE is that they are empowering people to improve their own lives.  These are not ideas that create dependency.  These are ideas that help poor people use their own ideas, initiative and hard work.  These are ideas that empower and promote human worth and dignity.  Interestingly, there is significant literature on how these ideas are helping to empower women.  By helping women make cash off of small family gardens, or by helping women establish micro-businesses with micro-loans, these ideas are helping women develop their own personal sources of income.  These ideas are helping to decrease the dependency of women on male income-earners, thus personally empowering women and raising the value of women in families and communities.

In conclusion, I know that my own thinking on this is currently under-developed and probably inconsistent and contradictory.  I came upon the concept of social entrepreneurship second to my exposure to the work of Paul Polak and iDE.  I have been impressed by the real, practical, workable ideas of iDE on the micro level of small farmers in Ethiopia.  So, despite some of my concerns about the idea of social entrepreneurship more generally, my interest in the work of iDE continues to grow.  Whether my interest in their work is because what they do is often labeled social entrepreneurship or in spite of it, I don’t know.

As always, thanks for reading.  I hope if you’ve taken the time to read this that you’ll also take the time to provide some feedback.  I am clearly no expert and want to learn more.  Feel free to reply to the blog post or email me directly at nfhaines@gmail.com.