Presented by Milford Bateman, Freelance consultant on Local Economic Development and Visiting Professor of Economics, Juraj Dobrila University Pula, Croatia at UNDP Bratislava Regional on 19 December 2011
Microcredit the Seductive Illusion of Poverty Reduction and Development
Microcredit: The Seductive Illusion ofPoverty Reduction and Development Milford Bateman Freelance consultant on Local Economic Development and Visiting Professor of Economics Juraj Dobrila University Pula, Croatia Presentation at UNDP Bratislava, 19 December 2011
Background• Background in 1970s Bangladesh and Yunus-led action research project• Grameen bank founded in 1983• Yunus claims MF will ‘eradicate poverty in a generation’• Many of Yunus’s peers claim this is incorrect and that you can’t scale up a village program -• Nonetheless, international donors pile into MF….
Background• Neoliberal policy-makers and neoclassical economists love microcredit• They value self-help and individual entrepreneurship, which they (quite wrongly – see Chang, 2011) see as central to development• Neoliberal policy-makers also hate all forms of state and collective effort, which microcredit appears to render redundant• In 1980s, USAID and World Bank set out to eradicate the subsidy element in line with its ‘full cost recovery’ mantra…• By the 1990s, the microcredit model becomes the neoliberal policy establishment’s most popular poverty reduction and development policy
The benefits• Of course there are benefits for some: – Poor can avoid loan sharks – Provides poor a way to manage consumption spending – Some individuals start a successful micro-business – Some women succeed and claim this is ‘empowerment’• But the absolutely fundamental question is, Do these upsides to MF outweigh the downsides?• Or is it like a casino, where we hear a lot about the winners and are told to ignore the losers, so that we can claim MF (and casinos) to really work against poverty!
Problems• Job and income displacement seriously impact on microcredit programs – ‘fallacy of composition’ means often no NET gains at all - Yunus completely misunderstood this..• Client failure – failure rate very high.• And client failure often means DEEPER poverty for them… – Leads to over-indebtedness, and to taking out another microloan to repay earlier ones…. – Repay by using savings and diverting remittances – Forced sales of assets, such as land, housing, vehicles, equipment, gold, etc – Some of the poor now accessing the loan shark more than before (e.g., Andhra Pradesh state in India)!
Problems• Consumption loans main (80-90%?) use of microloans, NOT to fuel microenterprises: but this means problems… – high interest rates – poor increasingly pay out a share of their income on interest payments…..is this a wise move? Maybe better to save? – MFIs typically claim justification is high transaction costs, but increasingly we have the ‘microfinance millionaires’ so maybe this is the ‘cost’ referred to here?
Problems• Commercialisation drive in the 1980s drove the final stake through the heart of MF – ‘microfinance millionaires’ phenomenon means high interest rates and destroyed social capital – shift into more profitable consumer loans – Destructive MF ‘meltdowns’….Bolivia, Nicaragua, Morocco, Bosnia and Andhra Pradesh in India – MF managers end up looting their own MFI, as in Bosnia, Mexico, India
Problems• Economic history shows no association between informal microenterprises and development• The ‘seedbed’ argument – not valid say La Porta and Schliefer…most formal SMEs start formally as SMEs• European countries mainly prospered through SMEs• East Asian ‘tigers’ also did well via SMEs linked into large firms• China a spectacular success thanks to TVEs (SMEs)• IDB ‘Age of Productivity’ (2010) indirectly destroys microcredit idea in Latin America
The sad example of Bosnia• Donors established microcredit as a major reconstruction policy right after Yugoslav Civil War ended in late 1995• Huge investment by donors, especially WB• Then private investors step in, massive increase in funding to institutions• By 2001-2, the country officially ‘saturated’ – all those who WANT a microloan, can access one• Claimed as major global success
The sad example of Bosnia• Approaching over-indebtedness flagged up as early as 2006, but nothing done• Then in 2009, the microcredit sector effectively collapsed: – Defaults rose to new heights – Double digit portfolio at risk (PAR) – Loan provisioning rises by more than 250% in just one year – Large numbers of clients drop out (raising costs per unit) – Entire microfinance sector plunged into a dramatic loss• Crucially, there has been a huge negative impact on the poor: – 28% all MFI clients ‘seriously indebted or over-indebted’ – Assets sold (at fire-sale prices) to repay microloans – Remittance and pensions diverted into repayment of microloans – 100,000 guarantors sought out to repay microloans fro friends and family – World bank finds around 50% of microenterprises in Bosnia fail in less than one year – so here poor lose other assets/investments when they exit….. – So no surprise that we see no sustainable development in evidence whatsoever
Conclusion• Microcredit idea might have started with good intentions, but it was a conceptually flawed ideologically-driven idea• Commercialisation then destroyed what little benefit apparent….• …but served to keep the idea afloat because some people could make huge private gains• But microcredit idea increasingly accepted as dead• The main development agencies now moving on to look at the ‘missing middle’ problem• And dealing with poverty through cash grant programs that are working very well everywhere
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