Microcredit, Macro Problems

Mar 06

The
awarding of the Nobel Peace Prize to Muhammad Yunus, regarded as the
father of microcredit, comes at a time when microcredit has become
something like a religion to many of the powerful, rich and famous.
Hillary Clinton regularly speaks about going to Bangladesh, Yunus's
homeland, and being "inspired by the power of these loans to enable
even the poorest of women to start businesses, lifting their
families–and their communities–out of poverty."

Like the liberal Clinton, the neocon Paul Wolfowitz,
now president of the World Bank, has also gotten religion, after a
recent trip to the Indian state of Andhra Pradesh. With the fervor of
the convert, he talks about the "transforming power" of microfinance:
"I thought maybe this was just one successful project in one village,
but then I went to the next village and it was the same story. That
evening, I met with more than a hundred women leaders from self-help
groups, and I realized this program was opening opportunities for poor
women and their families in an entire state of 75 million people."

There is no doubt that Yunus, a Bangladeshi
economist, came up with a winning idea that has transformed the lives
of many millions of poor women, and perhaps for that alone, he deserves
the Nobel Prize. But Yunus–at least the young Yunus, who did not have
the support of global institutions when he started out–did not see his
Grameen Bank as a panacea. Others, like the World Bank and the United
Nations, elevated it to that status (and, some say, convinced Yunus it
was a panacea), and
microcredit is now presented as a relatively painless approach to
development. Through its dynamics of collective responsibility for
repayment by a group of women borrowers, microcredit has indeed allowed
many poor women to roll back pervasive poverty. However, it is mainly
the moderately poor rather than the very poor who benefit, and not very
many can claim they have permanently left the instability of poverty.
Likewise, not many would claim that the degree of self-sufficiency and
the ability to send children to school afforded by microcredit are
indicators of their graduating to middle-class prosperity. As economic
journalist Gina Neff notes, "after 8 years of borrowing, 55% of Grameen
households still aren't able to meet their basic nutritional needs–so
many women are using their loans to buy food rather than invest in
business."

Indeed, one of those who have thoroughly studied the
phenomenon, Thomas Dichter, says that the idea that microfinance allows
its recipients to graduate from poverty to entrepreneurship is
inflated. He sketches out thedynamics of microcredit: "It emerges that
the clients with the most experience got started using their own
resources, and though they have not progressed very far–they cannot
because the market is just too limited–they have enough turnover to
keep buying and selling, and probably would have with or without the
microcredit. For them the loans are often diverted to consumption since
they can use the relatively large lump sum of the loan, a luxury they
do not come by in their daily turnover." He concludes: "Definitely,
microcredit has not done what the majority of microcredit enthusiasts
claim it can do–function as capital aimed at increasing the returns to
a business activity."

And so the great microcredit paradox that, as
Dichter puts it, "the poorest people can do little productive with the
credit, and the ones who can do the most with it are those who don't
really need microcredit, but larger amounts with different (often
longer) credit terms."

In other words, microcredit is a great tool as a
survival strategy, but it is not the key to development, which involves
not only massive capital-intensive, state-directed investments to build
industries but also an assault on the structures of inequality such as
concentrated land ownership that systematically deprive the poor of
resources to escape poverty. Microcredit schemes end up coexisting with
these entrenched structures, serving as a safety net for people
excluded and marginalized by them, but not transforming them. No, Paul
Wolfowitz, microcredit is not the key to ending poverty among the 75
million people in Andhra Pradesh. Dream on.

Perhaps one of the reasons there is such enthusiasm
for microcredit in establishment circles these days is that it is a
market-based mechanism that has enjoyed some success where other
market-based programs have crashed. Structural-adjustment programs
promoting trade liberalization, deregulation and privatization have
brought greater poverty and inequality to most parts of the developing
world over the last quarter century, and have made economic stagnation
a permanent condition. Many of the same institutions that pushed and
are continuing to push these failed macro programs (sometimes under new
labels like "Poverty Reduction Strategy Papers"), like the World Bank,
are often the same institutions pushing microcredit programs. Viewed
broadly, microcredit can be seen as the safety net for millions of
people destabilized by the large-scale macro-failures engendered by
structural adjustment. There have been gains in poverty reduction in a
few places–like China, where, contrary to the myth, state-directed
macro policies, not microcredit, have been central to lifting an
estimated 120 million Chinese from poverty.

So probably the best way we can honor Muhammad Yunus
is to say, Yes, he deserves the Nobel Prize for helping so many women
cope with poverty. His boosters discredit this great honor and engage
in hyperbole when they claim he has invented a new compassionate form
of capitalism–social capitalism, or "social entrepreneurship"–that
will be the magic bullet to end poverty and promote development.

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