Tuesday, February 20, 2007

microfinance and international development

The Cato Institute, a right-of-center US think tank with close ties to certain members of the Bush Administration, has made an intervention in thinking about microfinance. Microfinance, as members of the international development community know, is the provision of very small loans to people with usually little or no credit history, so that they can tide themselves over during shortfalls in cash flow or, hopefully, invest in productive micro-entrepreneurial activity. Loans are often made to individual women, but women have to be members of a group, that acts as a discipline to enforce repayment of the loan. Repayment rates are impressive, and returns on equity have increasingly start to attract transnational finance capital--companies such as Citigroup. The titular founder of the global microfinance movement, Dr Mohammed Yunnus, the creator of the Grameen Bank in Bangladesh, won this year's Nobel Peace Prize. Dr Yunnus believes that access to finance is a fundamental human right. Microfinance has been, for a long time, seen as a 'magic bullet' in international development, capable of energizing growth with equity across the poor countries of the world.

It might be surprising, then, to learn that the Cato Institute has a very low opinion of microfinance. What was even more surprising to me, though, was the extent to which I agreed with many of the criticisms of the Cato Institute. The Institute argues that most people are not entrepreneurs, and so the idea that microfinance can be used to build viable micro-enterprises is unlikely. Cato also notes that microfinance has played a very small role in the creation of actual businesses in the South, as it is often used for smoothing cash flow problems rather than investing in productive activity. It stresses the heavy subsidies paid out to support microfinance, which sustain the supposedly good returns on equity. Finally, Cato argues that growth should come first, and then credit, with growth funding profits that can be reinvested back into enterprises.

Where Cato misses some of the story is the relationship between microfinance, poverty elimination and the development of capitalism in contemporary poor countries. Most microfinance does not reach the poorest; rather, it reaches the so-called 'near-poor' who are more creditworthy than the poor. These people are often rural, and in a transition from a subsistence mode of life towards a far more market-oriented, coercively competitive existence. In other words, microfinance can allow people that are being to accumulate some assets, to improve their standard of living, to further accumulate. This is not a poverty-elimination strategy, though, because the bulk of the resources do not reach the poorest of the poor. In this sense, then, microfinance is, in effect, no different than the state-led financial revolution in the poor countries of the South in the 1960s--a means of building capitalism, not eliminating poverty.

Cato is therefore wrong that growth needs to come first. As microfinance can support accumulation, it can support growth. The problem, in this as in so many areas of international development, is one of distribution. Poor people don't have the means to access the finance they need. They rely on moneylenders, who are often their patrons, or on more traditional localized means of allocating finance, such as rotating savings and credit associations. These resources are indeed used to smooth cash shortfalls. Poor people do want to invest; but to invest, they need assets that they do not have--land, tools, animals, access to work. Distribution is the key to engendering growth that has the capacity to eliminate poverty. Growth is very, very important, but on its on, growth, the building of markets, the creation of trade and exchange, is a way of building inequality-generating processes. Some magic bullet.

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