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Excerpt from “The Political Economy of Microfinance: Financializing Poverty”, Chapter 6, At the Crossroads of Development and Finance. (see other excerpts here)

Re-evaluating microfinance

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.[1] 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.

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Joseph Hanlon, Armando Barrientos, David Hulme, 2010: Just Give Money to the Poor: The Development Revolution from the Global South. Sterling: Kumarian Press.

If it sounds novel to suggest that if you want the poor to have more money, you could just give them money, these are strange times. What could be more straightforward than giving money to people in need? But cost recovery, self-help, and “financial deepening” are essential tenets of the current development ethos, so someone must go out and make the argument – as Joseph Hanlon, Armando Barrientos and David Hulme do in Just Give Money to the Poor – that simply handing out cash may be easier, and better, than anything else.

Cash transfers are a rising idea in development policy. Even The Economist likes them. Still, they are far from a hype, and little is known to most people about the successful programmes implemented by Brazil, Mexico or Indonesia, for example. This book aims to change that. Perhaps its greatest strength and weakness is its simplicity. But hard science can be discussed elsewhere. Just Give Money to the Poor introduces a broader audience, and gives impetus, to the simple but still-controversial idea: that redistribution works.

The authors recap evidence from two decades of experimental and pragmatic progress on social transfer programmes in the developing world. They argue that no-strings-attached, widespread systems of cash distribution are far more effective and cheaper than other models, such as vouchers, food subsidies (where monitoring creates costs) or microcredit. The key is that the money must be a dependable, substantial and easy source of income for the poor. Assured regular cash transfers – not charity or philanthropy – are the key, even at a relatively small scale, for achieving impressive outcomes:

“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.”

The target groups could be particularly vulnerable demographics – children, the elderly – or simply everyone. Programmes can be gradually expanded as experience grows, since garnering political support by demonstrating impact, fairness and adequacy, is key. Read the rest of this entry »

The Book

Governance across borders: transnational fields and transversal themes. Leonhard Dobusch, Philip Mader and Sigrid Quack (eds.), 2013, epubli publishers.
December 2018
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