Effective Altruism Must Rise!


“They only asked us to remember the poor–the very thing I also was eager to do.” Galatians 2:10.

We are all obsessed with the poor. We frame our political positions around them and use them to guilt our children into finishing their food. Students are particularly eager to make a difference. Campuses around the world have an endless supply of student run programs which target low-income communities using various education and health interventions. A new trend has been the rise of entrepreneurship as tool to build the self-reliance of the poorest and hopefully lift them out of poverty and the associated social-ills. And like all trends, it hasn’t missed campus.

One of the projects I got involved with was an entrepreneurship course for unemployed people living in the townships of Cape Town. Actually it wasn’t the townships, it was a township. Can you guess which one? Khayelitsha duh! The intervention was meant to equip the participants  with the necessary skills to become self-reliant entrepreneurs. We would recruit the entrepreneurs through an interview process, then teach them some basic business accounting skills. Upon completion of the program they would be given credit at a second-hand clothing store to stock up on inventory for their new retail business (though there we some who didn’t go this route). To a second year economics undergraduate this sounded great. Of course the cure to South Africa’s unemployment issue is more businesses to employ people. We weren’t handing out fish, we were teaching people to fish, Mrs Thatcher would be proud. Being involved was a great deal of fun for us, the consultants. We saw ourselves applying our dull world-class business knowledge in a meaningful way and the entrepreneurs kept coming back so it felt like it all worked for the most part. The program has since fizzled out due to a host of issues and has since been relaunched under a new name, this time the target is existing business owners.

Upon reflection, this time as someone with slightly more education, I now see that the original program had some problems which may have led to it’s ineffectiveness. The first problem was the premise that the unemployed are latent entrepreneurs waiting for the right boost. This may be true of other places, but South Africa has low rates of latent as well as actual entrepreneurship. A second problem lay with the course content. We only taught simple accounting to the entrepreneurs and little else. The Business Bridge is a program  which provides business skill training to entrepreneurs in low-income communities. They have partnered with the World Bank, London Business School and J-Pal to evaluate the efficacy of their programs using a Randomized Control Trial (RCT). RCTs are currently the gold standard in development impact research. As of 2014 the results were still preliminary, but none the less clear. Both interventions did better than the control group, but marketing skills did more to boost sales, profit, survival rates, and employment generation than financial management. The third problem was assuming that there was a market for second-hand clothing. I don’t think this is true for South African townships. Only the Bohemian suburbs of Cape Town. A World Bank survey on the South African Informal Economy conducted in Diepsloot (A Gauteng township) found that only 38% of total household clothing expenditure was spent in Diepsloot. With average expenditure being R54, this doesn’t seem like a market for an inexperienced entrepreneur selling second-hand clothing. The evidence in support of our little project just wasn’t there.

The evidence problem is not one which is peculiar to our project or student run projects alone. Many well-meaning (often expensive) interventions are carried out without considering whether or not they will be effective. For some, it is only money that is being wasted. Others actually result in a negative impact on the targeted group. A famous example of an intervention that went wrong was Scared Straight which took children on jail tours to disincentive a life of crime. RCT evidence later showed that children who had gone through the program were actually more likely to behave badly in the future. South Africa as a reasonably resourced, yet issue-plagued, country has a host of NGO, private sector, and government run interventions. I am not sure how many of these are founded after considering existing evidence in support of them, or engage in regular impact evaluation to track whether the intervention is producing the desired impact in the target group.

There many methods for evaluating social impact, each ‘for-good organisation’ can and should find one which works best given the work they do and make those results as readily available as their financials. Few of us would be willing to take medicine which hasn’t been through some process to verify it’s efficacy. We also wouldn’t be willing to pay for someone to be given that medicine so let’s stop trying to fix strangers’ lives with tools which may not fit for purpose.

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Hope or Hopelessness


If there is one thing I want to do right for my honours thesis is to give it a snazzy title. Higher order goals, like a first class pass, a man can dream, are secondary. But before I start thinking of that I need to get the heavy lifting out of the way first and boy is it heavy.

My research looks at informal self-employment in South Africa by using the unnecessarily comprehensive National Income Dynamics Study. So comprehensive it is that I know that in 2008 no South African households gave away green peppers (what happened to Ubuntu?), but did spend R16.80 per month on peanut butter. Fortunately, those aren’t my variables of interest. The question I hope to have answered by the 14th of September 2015 is what is driving South African to open and close their informal enterprises. Initially, I thought that I would simply be doing a determinants of informal enterprise performance what makes them grow. However, when I first opened the data set to begin the cleaning, merging and other boring data preparation, I found that only 42 observations in the sample had run businesses which had survived from the first wave of NIDS to the third. NIDS is a panel study, which means that it tracks the same observations overtime. In total the sample consists of about 29 000 observations and is obviously meant to be representative of the South African population at the national level. The fact that only 42 observations remained in informal self-employment between 2008 and 2012 presents a far more interesting question than performance. Where are these business people going and coming from? Who is most likely to enter and who to leave? The answer could have serious policy implications in country facing and employment and growth crisis.

The literature which exists at the moment on this question as it pertains to developing country’s points to the informal sector being a place of refuge for those who for whatever reason are not able to find formal employment in the informal sector. Most scholars take the view that it is a form of “disguised unemployment”. An innovation approach applied to Argentine data finds that it is when the macro economy is in the pits that the informal sector swells and the opposite occurs when times are good. Intuitively, this hypothesis can be said to hold for South Africa too.

My interest in the enterprise behaviour of the poor began when I became involved with a student-run microenterprise development project operating in Khayelitsha. The people who came to us to start a business where doing so because their survival depended on it since they were unemployed and living on welfare which was not enough to meet the needs of their families. I’m sure that many of them wouldn’t have joined the program if they had a stable job and sufficient income.

It can argued be that there are non-monetary benefits to this kind of employment. As many informal enterprises are home or neighbourhood based, entrepreneurs (particularly female) are able to look after children and elderly family members without having to forgo their income. In addition there could be a psychological gain from being one’s own boss or profiting from your talents. Unfortunately, the empirical evidence in support of this is ambiguous at best.

The policy question to come out of this then is whether or not, given our too huge unemployment levels and too slow economic growth rate, we should continue pouring resources into this political silver bullet? South Africa has established an entire Ministry for Small Business Development in addition to the many government agencies with this mandate and NGOs doing the same work. Business Development is also at heart of the Democratic Alliances plans for the economy when they come into power in 2029 with nearly 60% per cent of the vote. I believe that this question can only be answered once we know the nature of informal self-employment decision at the micro-level because it is essentially entrepreneurship from scratch and could possibly act as a business incubator, as policy-makers hope, if the right people are choosing it instead of employment as opposed to being forced into it by unemployment.

If the answer is the latter, the next question becomes how should we treat the informal sector. More specifically, should we not rather look at it as a source of short-term welfare and not long-term prosperity generation? We hope that those who are the recipients of government grants will one day no longer need to rely on the state for their daily bread and will use at least some of the proceeds to make welfare increasing investments (for example in education) to that effect. The same should be said for informal self-employment at it currently stands. Perhaps only once these investments have been made and their returns realized will we be able to look at self-employment from a growth orientated lens.

A Note on the Informal Economy

Credit: City of Cape Town

Credit: City of Cape Town

Nobody needs to be told about South Africa’s unemployment and poverty problem, that the numbers are too high and we need an urgent intervention if we are to lower them. Beyond the efforts of business and the state, there is a small, but significant layer of the economy where the most marginalized people have started taking control of their livelihood creation, unfortunately they have yet to be given the recognition, protection and support which they deserve.

The informal economy is defined as all economic activity which is not taxed or monitored and subsequently isn’t included in any gross domestic product calculations. In South Africa it is estimated to be 10% of gross domestic product (GDP).

South African informal economic activity is everywhere you look. It’s the street trader at the intersection and the flower lady on Adderley (probably the hipster selling old vintage clothes too). It’s the spaza shop and shebeen in the township and the minibus taxi on Main Road. The nature of the activity is diverse some people barely make the equivalent of the minimum wage and others are the envy of many formal business owners.

It is quite disappointing to see how the State has handled the question of informality so far. The heavy-handed approach by the law enforcement and the high barriers to entry set by law makers through permits and bylaws regarding trading zones etc., has effectively criminalised informal traders. Criminal activity by nature is informal, but informal economic activity is not, by nature, criminal. It shouldn’t be treated as such. It’s a family supplementing their income and an entrepreneur chasing their dream and should be respected for that.

The government does deserve some credit, it can be commended for providing programs such as SEDA which are supposed to help small business to grow by providing access to incubation and funding. I recently attended the Informal Economy Micro-Enterprise Summit hosted by the City of Cape Town where I learnt about other initiatives outside of the state which provide assistance to entrepreneurs. The success of these initiatives is debatable and many seem to be competing amongst one another for the most glamorous or cutting-edge program rather than on a basis that is focused on the entrepreneurs themselves. [Disclaimer: I am part of a student run version of these initiatives]. However, their existence shows that South Africans are realising that we need to boost entrepreneurship if we are to create the jobs that we need.

But what about those businesses that aren’t established to grow and become the next MassMart? The majority of informal enterprises are survivalist. They are meant to supplement household incomes beyond the wages and social grants which they receive. These businesses aren’t going to take over the world. If you were to look at the informal chicken feet trade you will find that there are thousands of these in townships, all of them have the same inputs and charge the same price it is simply a volume game. There is nothing about a man or women with a rusty braai on the side of the road that inspires much entrepreneurial confidence, but that’s an extra R2500 in that person’s pocket that they wouldn’t otherwise have and what may be the difference between their child having uniform for school or their mother having medicine when she’s ill.

There is dual-nature to the informal sector; it is an incubator and it is also a lifeline, either way it shouldn’t be criminalised. We need to understand and support all the types of businesses it presents and find solutions to ensure their sustainability. There is a feeling that South Africa is becoming increasingly tense; when you turn hardworking entrepreneurs into criminals, you aren’t doing anything to ease that tension.