Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 6, At the Crossroads of Development and Finance. (see other excerpts here)
Although definitive policy prescriptions go beyond the scope and intent of this book – as a political economy of microfinance, not a policy appraisal – I hope that it may contribute to a reconsideration of microfinance… Putting the current state of impact evidence together with my analysis of microfinance as financializing poverty begs the question: If we have no proof that microfinance reduces poverty, but we do know that it extracts labour power from the poor, why should we continue with microfinance? And since the research presented here draws into question the hopes placed in, and the policy attention devoted to, microfinance as a developmental tool, what practical lessons can be drawn?
Enthusiasts believe that, in the case of the microfinancial industry, the interests of capital owners, financial intermediaries and the global poor can be aligned. That the poor see a share of their labour power extracted by a new financial industry might well be justifiable (in terms of social policy), if measurable, demonstrable benefits to the poor were to systematically arise. But the fact that, on the one hand, systematic benefits for the poor are difficult if not impossible to demonstrate after more than three decades (in studies whose designs aimed to find these benefits, and whose frame of comparison was that of doing nothing at all), while on the other hand, microfinance does demonstrably impose systematic costs on the poor, makes the arguments put forward in its defence look increasingly questionable.
Furthermore, instead of purging them, the microfinancial industry has come with many of the trappings of “normal” finance: excesses, crises, bailouts, overindebtedness, fraud, sale on false premises, collusion, predatory lending, abusive practices, irrationality, speculation and greed. These aspects of the credit relation constructed by microfinance should also be considered in any overall appraisal.
One perfectly logical option for policy-makers would be to discontinue their direct and indirect support (including financial support, logistical support and conducive policy changes) for microfinance systems, until the day their beneficence can be proven. Another logical possibility would be to regulate the sector in such a way as to ensure that the interests of investors and MFIs cannot supersede those of their clients. Yet the sector remains deeply averse to such regulation with teeth – such as interest rate caps or loan usage restrictions – and will likely strongly resist it by employing arguments that emphasize poor people’s right to choose between different credit sources and modalities which would be curtailed by regulation.
There are always alternatives
Acknowledging – as many in the industry today do – that credit or financial services alone can only be “part of the solution”, but then to proceed after such verbal acknowledgements to concentrate on the provision of financial services – primarily credit – makes the statement meaningless and hollow, and dissuades one from hoping for any fundamental changes from within the microfinance sector and its corona of supporters.
To look beyond microfinance and consider more comprehensive changes in policy, rather than mere reorientations within microfinance, will be necessary. The real challenge today is to make more democratic paths of development possible, for which the best I can do is point to sketches of interlinked policy alternatives. (Having critiqued one grand vision of development, to promote other grand visions here would be misguided.)
There are valid ecological and social arguments against pursuing economic growth. But, lest these be misunderstood as taking the edge off claims that microfinance undermines economic development by misdirecting funds into no-growth activities (Bateman 2010), it should be clear that the neoliberal turn and its financialized twists have by no means disavowed growth, having merely led to the pursuit of growth that is built on greater inequality while creating greater obstructions to growth for those farthest behind. … If economic growth is the goal, microfinance clearly is not the way. Development interventions aiming for more inclusive and long-term growth – to echo the call of a recent UN Conference on Trade and Development (UNCTAD) flagship report – should abandon “finance-driven globalization” in favour of “development-led globalization” (UNCTAD 2011).
Countries which grew rich in previous eras succeeded by actively directing investment and production towards building up large, internationally competitive corporations which moved up the global value chain and generated widespread employment, while protecting domestic industries – which often incurred losses over periods of many years – from international competition (Chang 2007). Also, and perhaps even more importantly, SMEs that were capable of supporting industrial development via backward and forward linkages were promoted through directed finance and appropriate policies (Zeitlin 2007). The key concept was scale, not “small is beautiful”; and it was not the “invisible hand” of the market that directed the economy but the visible hand of the state.
Yet the political project of developmentalism has evident weaknesses that stem from the era in which it originated, and a turn backwards to classical developmentalism risks creating (and perhaps even excusing) the harsh industrial working conditions, strong social control and little or no consideration for ecology which usually went hand in hand with industrial development. Persistent labour rights violations and environmental degradation in countries with rapid industrial growth such as China show that the developmentalist approach is far from automatically socially uplifting or even economically sustainable.
Building blocks for a more social and ecological alternative may instead be found in what has become known as the Kerala model of development, where an interventionist state government provides the social services that are necessary for a high level of social development despite low economic output. Many things are far from perfect in Kerala, but some facts are striking. The average man in the Indian state of Kerala has a longer life expectancy than a black man born in the USA. American black women and Keralan women both reach, on average, 76 years, and infant mortality rates are lower, even though Kerala’s GDP per capita amounts to a tiny fraction of the USA’s [references in book].
Kerala need not remain a freak aberration from the tacitly accepted rule that social development only follows in the wake of (market- or state-driven) economic growth, but rather could stand as a paradigm for social development being most easily attainable, with or without industrial development, under the auspices of an economically interventionist and socially liberal state. The Keralan experience fundamentally supports the notion of abandoning finance in favour of real social policy.
Finance has never worked as a solution on its own, and may not even be an important part of any effective, larger policy package for poverty reduction. Undoubtedly, to take a well-known example, the cooperative financial institutions that were set up by Raiffeisen and Schulze-Delitzsch contributed to German artisanal and agricultural development in the 19th century by creating some jobs, strengthening food security and freeing resources for industrial development. However, the poverty of working people in Germany only began to be systematically and decisively addressed through the social insurances and welfare systems which Otto von Bismarck offered as an anti-socialist concession to the radicalising working classes (Beck 1995).
Undoing microfinance by replacing credit with social entitlements is hardly utopian, particularly if the poor are empowered not as consumers or entrepreneurs but as citizens who can demand these entitlements. A congruent, emerging idea in development policy in recent years, building on the experiences of countries such as Brazil, Mexico and Indonesia, is cash transfers.
These have often been fairly narrowly targeted and selective, not progressively financed, and they have been made strictly conditional on family behaviour, such as school attendance or vaccinations, thereby bringing new (gendered) forms of government and rule into poor people’s lives (Lavinas 2013). Yet a more radical approach of granting completely unconditional basic incomes, as a redistributive measure, is equally feasible. Two decades of experimental progress with social transfer programmes in the south have shown that no-strings-attached, comprehensive systems of cash distribution are not only effective but also cheap compared with other means of social assistance, such as vouchers, food subsidies and traditional welfare with their high monitoring costs (Hanlon et al. 2010) – or microcredit, whose costs are borne by the poor.
Regular cash transfers based on entitlements (not charity, philanthropy or loans) can alleviate injustices even within the bounds of highly unequal societies. The advantages are manifold: In the short term they reduce poverty levels and ameliorate suffering. In the medium term, they enable many poor people to exercise their agency and pursue micro-level plans to increase their productivity and incomes. In the longer term, they create a generation of healthier and better educated people who can seize economic opportunities and contribute to broad-based economic growth. (Hanlon et al. 2010: 165)
Cash-transfer programmes may start small, within the means of very poor states or subnational entities, by targeting particularly vulnerable demographics, such as children, first, and then gradually expanding the beneficiary population. The financial commitment that is required to make a meaningful difference with transfers need not even be very large, especially if implemented transnationally.
Cash-transfer programmes even fit well with the findings of books such as Portfolios of the Poor (Collins et al. 2009), which suggest that poor people know better than anyone how to manage their lives. But unlike the microfinance models advocated by Portfolios, entitlement-based approaches do not retain the Victorian-era moral suspicion that poor people will squander money unless they are disciplined by repayment pressures, or the need to earn money first.
As Hanlon, Barrientos and Hulme (2010: 175) put it, “Poor people, who have struggled to survive on tiny amounts of cash, are good economists who use additional money wisely.” Where microfinance interventions demand that poor people take risks, transfers bring security; where microfinance interventions temporarily lend money, transfer programmes permanently grant the wherewithal to make long-term plans; where microfinance interventions target the poor as consumers or providers of labour power, transfers endow citizens with inalienable entitlements.
Microfinance has thrived on promises of empowering the poor with finance. But empowerment, even at its best, only “involves people developing capacities to act successfully within the existing system and structures of power, while emancipation concerns critically analysing, resisting and challenging structures of power” (Inglis 1997). Policies for empowerment are about poor people getting the means to better their situations individually – for instance, through cash transfers, as suggested above.
While being empowered is certainly better than not being empowered, the dependency on systems over which one has little control remains. More desirable would be to place the tools for emancipation in poor people’s hands; for “analysing, resisting and challenging” the relations of poverty that they live in. At a utopian level, maybe emancipation requires transforming people’s consciousness, which actors from liberation theology to India’s Naxals have sought to do – usually with less success than planned. However, at a more practical level, political processes can also seek to build on the agency of poor people to address collective social problems in an emancipatory way.
To recall, in microfinance for watsan in India, the collective level was the one where issues of politics, public capacity, values and equity stood in the way of the expansion of watsan access. Fortunately, cases of participatory democracies being able to overcome precisely such collective-level problems through emancipatory politics are well documented (Fung and Olin Wright 2003).
A paradigmatic case is the city of Porto Alegre in Brazil, which has been widely studied for its participatory municipal budget through which citizens publicly manage and control municipal utilities and social services, effectively owning and governing the city as an emancipated populace. In Porto Alegre, citizens themselves take the strategic decisions about what improvements to use their collective funds for, with the result that the city has attained the highest level of human development of all major cities in Brazil.
Here, as in Kerala, the basic resources for a decent life have not been financialized but socialized. The water system reached a 99.5 per cent coverage rate by the turn of the millennium – the only major city in Brazil to achieve this – while the users paid some of the cheapest rates in the country (Hall et al. 2002). But perhaps even more importantly, the participatory regime in Porto Alegre has “translated … movements that sought to “politicize” and expand citizenship, into citywide practices of demand making that radically democratized access to resources and services … Literally thousands of Porto Alegre’s poorer citizens have participated and made claims” (Baiocchi 2005: 152).
Margaret Thatcher famously claimed “TINA” (there is no alternative) to the liberal, individualist economy. But there are alternatives to indebting the poor to pay their own way out of poverty. Creating more economically democratic societies with the perspective of politically emancipating (or at least truly empowering) citizens, instead of more marketized or financialized societies resting on competition and uncertainty, should be recognized more broadly again as a means for better social development – or as an end in itself.
For this, hopefully it will be possible to salvage the self-help idealism from microfinance, to employ it for initiatives that help poor people to gain transformative control over their destinies. The image ingrained in the mobilizing narratives for microfinance, of poor people in the global South not as mute, passive or lazy beings, but masterful craftspeople of indomitable livelihoods under the most difficult circumstances, is morally and practically preferable to the image of passive masses waiting to be developed from above.
Can the desirable ideal of “helping people help themselves” (Ellerman 2006) be purged of the risk of cynically telling those whose attempts are regularly thwarted by structural constraints, or who may simply be in need of help, full stop, that the only help they will get is self-help? One must, at the very least, remain keenly aware of latent risks of romanticizing the poor, whether as entrepreneurs, consumers or citizens, in light of the immense existing power asymmetries.
In a best-case scenario, the vision of placing the power for social improvements in the hands of the active, creative, resilient Asian, African or Latin American woman may be the most lasting legacy of the microfinance experience. But only with realistic expectations about the power of poor people to help themselves can the present crisis of neoliberal development models, amid the larger crisis of ideologies which produced financialized capitalism, be used to successfully relaunch rights-based and emancipatory projects for social change.
- We can only speculate about whether “consumption smoothing” or a general sense of “inclusion” are intrinsic benefits.
- To give a very concrete example, the MDG of halving the number of people without access to watsan in Sub-Saharan Africa could have been reached with transfers of just $4.80 per year from each person in 15 Western European countries (Rosemann 2005).
Mader, Philip: The Political Economy of Microfinance: Financializing Poverty. London: Palgrave-Macmillan, June 2015.