Let Them Eat Cake!

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Following yesterday’s class, I was incensed that we had not managed to solve the problems of the world in two hours of heated IR discussion.  Then I remembered that some bright spark had mentioned the potential for micro- financing to save the day.  So, I took it upon myself to take a closer look at the potential for this wondrous idea to transform the dreary lives of the poor into the fabulous lives which we currently enjoy.

First, a short history on micro financing:  Micro financing is the provision of small loans to the poor who would otherwise be unable to gain financial support through traditional means.  It was started in 1976 by Dr Muhammad Yunus, the Head of the Rural Economics Program at the University of Chittagong, who launched an action research project to examine the possibility of designing a credit delivery system to provide banking services targeted at the rural poor. What started with a $27 loan to a group of women who made bamboo furniture subsequently grew into the Grameen Bank Project (Grameen meaning “rural” or “village” in Bangla language).

The Grameen Bank Project had the following objectives:

  • To extend banking facilities to poor men and women;
  • To eliminate the exploitation of the poor by money lenders;
  • To create opportunities for self-employment for the vast multitude of unemployed people in rural Bangladesh;
  • To bring the disadvantaged, mostly the women from the poorest households, within the fold of an organizational format which they can understand and manage by themselves; and
  • To reverse the age-old vicious circle of “low income, low saving & low investment”, into virtuous circle of “low income, injection of credit, investment, more income, more savings, more investment, more income”.

Grameen grew to have 8.3 million customers in Bangladesh alone and more than $1 billion in loans outstanding. It boasted a 98.5 per cent repayment rate, with villagers taking loans in groups and guaranteeing each other’s debts.  Significantly, 90% of the bank’s shares were owned by its borrowers, with the other 10% owned by the government. The list of awards and accomplishments the Grameen achieved is extensive (there’s a Nobel Peace Prize in there!)

Micro financing was touted as a “bottom up solution to poverty”, and rapidly gained support from the highest offices; wealthy philanthropists such as George Soros and eBay co-founder Pierre Omidyar pledged hundreds of millions of dollars towards the microcredit movement. The UN announced 2005 as the International Year of Microcredit, and UN General Secretary Kofi Annan touted micro financing as a solution to global poverty, stating “the great challenge before us is to address the constraints that exclude people from full participation in the financial sector. Together, we can and must build inclusive financial sectors that help people improve their lives.”

But the lustre of micro finance came to a rapid halt circa 2006 when critics of the system began to crunch the numbers and found that, far from being the fountain for sustainable development, in many cases micro financing actually disadvantaged the poor it was intended to help!   Having been hailed as a magic solution to poverty for more than a decade, the enemies and sceptics of microfinance were now having a field day, with allegations of “loan-sharking”, high interest rates and intimidation being broadcast across western media on a regular basis.

The 2007 film Micro Debt, by Danish film maker Tom Heinemann, is an interesting critical investigation into the darker side of microcredit for anyone interested.  It outlines the intimidation, harassment and abuse of borrowers by members of their loan groups, and shows the spiral of indebtedness which can occur and take years to escape.  In some cases, suicide appears to be the only viable escape; in the Indian state of Andhra Pradesh more than 50 farmers committed suicide and micro financing has now been made illegal in that state.

From an IR perspective, Microcredit has been criticised as being a neoliberal fairy-tale, as it is based on an attractive but false premise that the individual can create wealth for themselves without outside assistance.  Unfortunately, enterprise which is begun with micro financing is unable to be sustained without assistance from government or aid funds.  Without this injection of funds, lending groups must charge high interest rates (reported to be up to 125% in some cases).  Feminists have also chimed in with their own critique, stating that micro financing does not encourage inclusion, participation or empowerment, but in fact has a tight set of rules set up to extend current global imbalances.

That being said, the growing network of microcredit agencies does provide a real difference to people’s lives by providing access to fresh water, sustainable agriculture and small business.  What it does not provide however is statistically demonstrable improvements in the economic, political and social structures which are likely to have caused much of the problem to begin with. But can we say that any aid does this, especially after the statistics presented to us following recent events such as the Rwandan genocide?

While micro finance may not be the solution to global poverty, perhaps Kiva is an approach with the more realistic potential to tap into the vast wealth of Western middle classes. Kiva allows aid to go directly from a small aid donor (like us) to an individual recipient without having to pass through the giant cogs of the international aid bureaucracy.  While this system is promising, it can only work if the middle classes participate, and the real problem is overcoming the inertia and indifference of the middle classes.  How do we do that?  Maybe the only way is to resort to the tried and tested methods and use guilt to pressure them into spreading the wealth to those who really need it.

Or maybe micro finance is all just a neo-liberal fantasy and we should discontinue our pursuit of this seemingly utopian dream.  Unfortunately, the debate continues.

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4 comments on “Let Them Eat Cake!

  1. aidangnoth says:

    Thanks for clearing that up. When we discussed micro-financing in class the other day I thought it sounded a bit far fetched, but now it seems like what we were discussing (or at least my interpretation of it) was Kiva.

    Micro financing from your explanation seems to entail the same pitfalls as any investment bank, with a constant balancing of risk and reward. The difference seems to be that micro-financing begins idealistically and can end in loan sharking if things don’t go as planned. Maybe this has something to do with the scale and frequency in which micro-financing was undertaken? Regardless, the idea that credit is given to the poor to start a job and then repay the loans as they become profitable rests on the fact that people are entrepreneurial and can start up a successful business. To me this sounds like a recipe for disaster as many of these people are poor not only financially but through lack of education and things also. While education mightn’t be necessary to start up a successful business, I’m sure it can only help. Micro-financing then, relies on people to make sound investments in themselves in order to levitate themselves out of poverty; it relies on poor people in completely underdeveloped countries to exercise good judgement and make worthwhile decisions which will pay off. Is this not asking to much of them? Even in my privileged position of having attended Kindergarten, Primary School, College and University I continually find myself eating 2 minute noodles due to my inability to exercise good judgement when investing money and struggle to see how micro-financiers wouldn’t realize that I’m not alone. The movie you mention (I watched the trailer at least :p) tells of how some people have undertaken micro-finances to repay debts and other micro-finances which makes me question just how these loans are given out and whether or not anyone actually attempts to review where the money is going and whether this person should be granted a loan or not.

    Kiva on the other hand seems even more idealistic, and while it wouldn’t allow for the same ridiculous cycle and spirals of debt that entails micro-financing as people aren’t required to pay back the money, it still relies on people making sound judgement when spending money. Once again this is a notion I find difficult to conceive. While circumstances for the poor are obviously different than my own, and my experiences can’t be extrapolated onto all of humanity (thankfully), the last three times I claimed Study Links course related costs I don’t think one cent of that actually wen’t to course material. While I’m sure if I gave 50 dollars to someone in Africa some of that might go to food and clothing, I’m fairly confident that not all of it would be invested well. The question then becomes how much of Kiva is wasted on a new pair of Nike shoes?

    Interestingly both of these concepts micro financing and kiva rely on the individual it seems, taking away the responsibility of the state to eradicate poverty, is it wrong to discount the state from this equation entirely?

  2. rpgordon says:

    Aidan, thank you for your very persuasive reply. Your analogy of micro financing and our use of course related costs really hit home, and I completely agree with you. Given that we, the educated middle class of the west, don’t use our loans for their intended purposes, how likely is it then that those in less developed countries will be disciplined enough to use it for business development rather than mere survival? And, considering the high illiteracy rates in many of those countries, individual development will need to be supported by state education and business reforms to enable loan recipients make to be best placed to make decisions.

    The fact is that no-one operates in a vacuum. Even a successful entrepreneur is unlikely to expand their business and make a marked difference in their social and financial position without local and global support structures in place. Without the tools necessary for a growing economy (financial regulation, trade and means of production), recipients of microcredit are unlikely to make any substantial difference to their lives other than new shoes and perhaps a mountain of debt. Of course they will survive, but at what cost?

    The Chinese example is probably best at demonstrating how state support through economic reforms and a production based model can make a real difference to impoverished societies. While micro financing may be a useful tool to aid development, it is too limited. For all of the achievements of Garmeen and the microcredit movement, Globalisation and large scale job creation remain the developing world’s best hope to reduce poverty and increase the proportion of lower middle class citizens. For true change to occur the state will have to be actively involved. This is something that China has done exceptionally well over the past 30 years, so much so that at present rates of economic growth, China could reach a US standard of living by 2030. Mandarin classes anyone?

  3. sengad says:

    While I agree with you that micro-financing and, to a lesser extent, Kiva entail some risks, mainly because they both rely on the individual’s sound judgment and ability to make good investments, and for the former because of the inherent risks in the credit industry, I think that what is needed is some sort of supervision by the state or an independent body, which would help prevent loan sharking and advise the recipients regarding viable investment options (but surely this already exists, doesn’t it?).

    As you stated, the existence of socio-economic structures and, I might add, political stability and structures are paramount to the success of micro-financing, or any development initiative for that matter. Micro-financing is not going to pull entire populations out of poverty on its own. And maybe that is where the problem lies: are we expecting too much of such mechanisms? Micro-financing was hailed as the solution to the poor of the world, and yet it hasn’t delivered up to our expectations. Does that necessarily mean that we should condemn it?

    I’m not familiar enough with the concept of micro-financing and its pitfalls, but as David Shearer reflected on the condemnation of NGO involvement in conflict areas in his paper, I wonder whether we’re not overemphasising the failures of this initiative too. Surely micro-financing has had its successes, no?

    Ps: nice title! Do you think we should prepare for revolution? :p

  4. adslater says:

    Interesting discussion… I have heard quite a lot of criticism of micro-financing in recent years, yet I am still a great supporter of the concept. I agree that with any financial transaction the appeal of $$$ to be made can undermine the initiative, especially as micro-financing occurs in those states that are especially prone to corruption and exploitation. However, I think what does work is when the credit lies within the hands of the community itself, rather than a third-party agency… this allows the finanical decisions to be made collectively, and if informed by community education, finacial training and support, allows the continued empowerment and development of the people themselves.

    There is an interesting case in Southern India run by a local NGO called ADATS, who initially establishes small collective ‘units’ within villages, and empowers them with training, education and intial start-up loans. These initial loans are then taken over and controlled by these Coolie Sangha units, with each member contributing a small part of their yearly income to bolster the ‘float’. Villagers apply and can access loans from their Coolie Sangha unit (controlled by the women of the village!), and then repay over an agreed time period at zero interest rates. It has proved to be very successful…

    http://www.adats.com/home/ccf.php

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