Liberian government must establish  business loan program to reduce chronic poverty and unemployment 

Sunday, February 24, 2008   

          By Rufus N. Darkortey   

The Liberian government's policy of overly relying on foreign companies as the primary providers of jobs is detrimental to the reduction of poverty and unemployment in the country.

The current initiatives by the government to attract foreign direct investments (FDIs) into the country should be applauded. However, the government must also understand that while this initiative is a necessary condition for jobs creation, it is not a sufficient and efficient strategy to reduce poverty and unemployment at this time.

Therefore, a continued dependency on foreign companies as the primary creators of jobs will not only continue to prolong the sufferings of the Liberian people, but it may also require approximately additional 200 years to cut the poverty rate from 90% to 45%. The reason is that the jobs that are being provided by most of these foreign companies have historically not, and may not, pay the kind of wages that can quickly lift Liberians out of chronic poverty. For example, the wages that are paid by Lebanese businesses, and many other foreign companies that are operating in the country, are less than US$15.00 per month or US$180.00 per year. Such insufficient wages have not shown the ability to reduce poverty since those companies started operations in the country approximately 100 years ago.

Additionally, the insufficiency and inefficiency of this policy is driven by the fact that the country does not have the capacity to attract large amounts of high quality (fortune 500) foreign companies. This is due to the lack of infrastructure, skilled labor, technology, the prevalence of poverty, good business environment, political stability, and acceptable market conditions; all of which when available, can drive down the cost of doing business in a country.

Therefore, the Liberian government must quickly enhance its economic stimulus policy by launching an aggressive government sponsored business loan program that will provide significant (large dollar) start-up capital and other assistance to potential Liberian entrepreneurs, so as to reduce the massive poverty and unemployment facing the country.

Factors Contributing to Poverty and Unemployment in Liberia 

The alarming rates of poverty and unemployment that are existing in the country is not a result of the lack of wealth within Liberia, but a total lack of leadership, vision, and will by successive governments since the country was founded approximately 200 year ago. This lack of leadership and vision has created three major barriers to reducing poverty and unemployment in the country. 

The barriers are:

The lack of infrastructure development: This barrier is mainly driven by the lack of a national development plan for the country. Countries with very powerful economies and very minimum rates of poverty and unemployment have established national development plans that set short, medium and long-term growth agendas. These plans are often established through legislative frameworks to ensure that they are implemented by successive governments. Unfortunately, Liberia does not and has never had a national development plan to ensure the systematic and strategic development of the country.

Rather, the country’s development is still shamefully dependent on presidential directives that are usually abandoned by the next president. This awkward practice is one of the main reasons why Liberians are chronically poor and unemployed because the biased and often inefficient characteristics of this dismal practice have left more than 85% of the country undeveloped.

Development plans that are based on presidential directives are often implemented for the political benefit of the president. As a result, the economic structures that are constructed under such bad plans do not usually provide jobs that can reduce poverty in the long run. For example, Liberian leaders are accustomed to ordering schools built in low or no income communities as way of identifying with the plights of the people, when they clearly know that such infrastructure will not survive the economic difficulties of those communities since the students and their chronically poor parents don’t have incomes to pay school fees to sustain the school. As a result, the failures of those kinds of schools do not provide long-term employment and academic opportunities, thus leading to poverty, unemployment, and illiteracy.

The lack of strong economy: This barrier is caused by the lack of purchasing power of about 90% of the Liberian people. The strength of any economy depends on buying and selling of goods and services. Buying depends on the purchasing power of consumers, which is driven by the strength of their real incomes. The strength of demand for goods and services in connection with capital to invest will encourage businesses to produce goods and services to meet such demand. These supply and demand mechanisms create market activities that in turn create significant jobs and wealth, thus minimizing poverty and unemployment within a country.

Unfortunately, since the founding of Liberia about 200 years ago, our leaders have not instituted policies or programs to develop or increase the purchasing power of the Liberian people. As a result, the country is continuously facing extreme unemployment and poverty.

The lack of modern education: This barrier is a result of the primitivism, inadequacy, and inefficiency of our educational system. Modern economies are driven by technological development and educational advancements, as evidenced by building and manufacturing of spaceships, automobiles, iphones, HDTVs, financial systems like the stock markets, etc. 

Unfortunately, Liberia’s educational system has not been developed to the extent that it can train her citizens to manufacture a plastic drinking cup. What a shame! Besides, according to available physical statistics, about 80% of all educated Liberians are limited to just high school education, which is directly correlated to the fact that 13 out of the 15 counties of the country do not have universities. This barrier is a key contributor to the massive levels of poverty and unemployment facing the country because most Liberians don’t have the skills to produce goods and services that are needed in the global economy.

Why Government Must Establish a Business Loan Program in Liberia

The Liberian government must provide business loan to potential or emerging Liberian business people because these people don’t have any means of attracting or obtaining capital (money) to start a business.

Starting a business requires money that could be derived from many sources, including banks, personal wealth, collective wealth, and/or government. Unfortunately, about 90% of the Liberian population, that is 3.1 million out of 3.4 million Liberians, do not have and will not be able to obtain money to start a significant business due to extreme poverty and unemployment. Moreover, the ability of the poor to obtain capital from the sources mentioned above is impaired by the following reasons:

Banks Don’t Give Loans to the Poor

Banks decision to give out business loans depends on factors including the borrower’s personal income or wealth, credit history, quality of collateral (property pledged to guarantee that the borrower will pay back the loan), the ability to locate a borrower when he/she defaults, etc.

It is very difficult, if not impossible, for 90% of Liberians seeking loans to meet any of the requirements that are set by banks due to extreme poverty. According to statistics, 85% of the country is unemployed. That is, they do not meet the minimum income requirements that are set by banks. Additionally, because many Liberians have been historically denied credit privileges by the financial systems, they do not have credit history that can increases their chances of obtaining a loan. Moreover, it can be fairly approximated that the average value of many residential houses owned by impoverished Liberians is less than US$500.00. As a result, these properties don’t qualify as collaterals that are desired by banks. The impediments to obtain a business loan are further worsened by the Liberian government’s continuous inability to establish a postal system and other systems that will allow borrowers to be located during defaults. Therefore, it can clearly be understood that if an alternative sources of business loan acquisition is not identified very quickly, poverty and unemployment will continue to drown our people into degradation.

The Government of Liberia Must Serve as Alternative Source of Business Loan

An aggressive government sponsored business loan program is the best alternative for providing substantial amount of business start-up capital to impoverished Liberians that are seeking to lift themselves out of unemployment and poverty. The government must quickly pass a law and provide the necessary funding that will establish such program to alleviate the pain and sufferings of the Liberian people.

Although the government has established the Interim Poverty Reduction Strategy (IPRS), and Poverty Reduction Strategy (PRS) to address poverty and unemployment, the goals of such strategy must be significantly enhanced by this proposed government sponsored business loan program. The government must establish this program because it is the only institution that has the resources and ability to assume and manage the risk inherent in making loan to the poor. At present, there is no private market or financial intermediation between borrowers and lenders due to the material risk of default associated with giving loan to the poor.

Although Robert Johnson, Founder of BET, has provided approximately US$30 million to provide business loans to the impoverished people of Liberia, such very worthy goodwill from foreign individuals, entities, and governments has not proven to be lifting Liberians out poverty and unemployment at an acceptable rate. The reasons are 1) these funding are temporary and will usually cease to continue when their providers abandon the program. 2) The amount of the grant or loan that is given under such temporary plan is usually very small to reduce poverty and unemployment. The average amount that is sometimes given to a recipient is US$200.00. These type of loans/grants are, once again, very small to have any significant impact on unemployment and poverty reduction in the country. Additionally, because these programs are not well managed to ensure continuity, they have not shown the capacity to reduce poverty and unemployment.

Therefore, the government of Liberia must establish an aggressive business loan program to ensure that Liberians have access to business loan as start-up capital as a way of reducing poverty and unemployment. For the program to have rapid and significant impacts on poverty and unemployment reduction, the amount of money that should be given to a potential recipient of this program should not be less than US$75,000.00, because the chances of the business failing is significantly diminished with bigger loan amounts. The empowerment of the disadvantaged people of our country can no longer be considered as a responsibility of our foreign friends.

Government Sponsored Business Loan Programs are Reducing Poverty and Unemployment in Other Countries

Many governments have established business loan programs with enormous results in terms of jobs creation and poverty reduction. The United States and the Canadian governments are leaders in this area. For example, the American government runs a Small Business Administration (SBA), the Federal Home Loan Banks (FHLB), the Federal Farm Credit Banks (FFCB), and the Short Term Lending Program, etc. On the one hand, the Canadian Government also runs the EcoTrust Canada loan program, Lloydminster Region Community Futures, Business Investment Loan Fund, etc. These governmental agencies are significantly providing stable, on-demand, low-cost funding to financial institutions to provide home mortgage loans, small business loans, agricultural loans, and other economic development loans to people that are disadvantaged in obtaining loan from traditional banks.

The loans provided by these agencies are sometimes in the range of US $5,000 to US $2 million. Besides, some of the foreign loan programs that are mentioned above were established 60 years ago. Therefore, the war in Liberia cannot be used to vindicate the Liberian governments from establishing such poverty and unemployment reduction programs for the country. The lack of vision, leadership, and will on the part of our leaders are the only reasons that can explain their failures to establish similar brilliant economic stimulus scheme for the Liberian people.

Therefore, the current government of Liberia must exercise good leadership, will, and vision by establishing an aggressive and significant business loan program that could ultimately reduce the chronic poverty and unemployment facing the country.

Benefits of a Business Loan Program for Liberia

A very aggressive and significant business loan program for Liberia has a win-win potential for both the government and people of the country. Such programs will exponentially increase economic activities and the tax base of the country, thus increasing the tax revenue of the country, while at the same time increasing the wealth of ordinary Liberians.

As the program gains momentum, unemployment and poverty will significantly fall. As the number of jobs increase, government incomes tax revenue will also increase. Additionally, an increase in job related income will increase the purchasing power of the approximately 3.1 million Liberians that are extremely poor; thus leading to proportional increases in the amount of revenue the government can collect from sales, excise, property, and other forms of taxes the government may assess.

Moreover, as more stronger and significant companies are created by this program, the economy of the country will grow stronger as well. Parents will now have the resources to provide quality education for their children; and teachers will be adequately compensated for their services. Also, the demand for other goods and services, including the demand for health care products, automobiles, household appliances like HDTVs, etc., will increase as well. The positive outcomes of these economic activities will ultimately promote the growth and development of our economic institutions, thus leading to the strengthening of the general economy of the country.

Business development programs have contributed to the strengthening of foreign economies by reducing poverty and unemployment in a very significant way. In the United States, small businesses are the main engine of the American economy. According to statistics of the Small Business Administration (SBA) of the U.S, small businesses accounted for 50.9 percent of the nation’s non-farm private jobs in 2004. The total number of small business established during that period was 5.9 million companies, which was 99.7 percent of all of the established firms in the country. These companies employed the total of 58.9 million people. In 2006, the total income generated by owners of American small businesses is US $992.5 billion dollars. This amount is a significant boost to the American economy by reducing poverty and unemployment in the country.

Therefore, once again, the Liberian government must establish a very strong and long lasting business loan program as a way of significantly reducing the chronic poverty and unemployment facing the country.

Rufus N. Darkortey, an economist, works for a major bank in Cleveland, Ohio. He can be contacted at darkort@aol.com or 216-577-3177.