Profiteers grow fat on microcredit model Funding innovation to reduce poverty falls victim to greedy 'social entrepreneurs' Milford Bateman, The New Age, Johannesburg, 6 January 2016 About 30 years ago, the international development community was in a state of high excitement. The perfect market-affirming solution to poverty in developing countries had apparently been found. Microcredit, also known as microfinance This involved giving micro-loans to the poor that allowed them to establish a range of very simple self-employment ventures that would generate income. Spearheading the concept was the US-educated Bangladeshi economist and future Nobel Peace Prize winner, Dr Muhammad Yunus, who portrayed microcredit as a panacea for a range of development ills. Yunus said it would rapidly eradicate endemic poverty and under-development by creating jobs, raising incomes and including previously excluded groups (notably women) into economic activity. His laudable objective would be reached by bringing capitalism down to the poor. With significant funding, especially from global aid agencies and private foundations based in the US, Yunus was able to establish his own "bank for the poor", the iconic Grameen Bank. The birth of hundreds of Grameen clones The Grameen Bank was quickly positioned as the "role model" financial institution for poverty reduction. It was then joined by international donor-financed Grameen clones across all developing countries. Yunus had effectively given birth to the global microcredit movement. Not surprisingly, for the neoliberal-orientated World Bank and USAid, the ideological case for microcredit was compelling. Microcredit resonated with their fixation on promoting self-help, individual entrepreneurship and market forces as the only way that the poor could escape poverty. With their help, the microcredit movement quickly elevated the supposed poverty reducing power of self-help and individual entrepreneurship to almost miracle status. To escape poverty, the poor no longer needed state intervention and other forms of "collective capability" such as trade unions, public ownership and strong regulations. Only one last hurdle had to be overcome before the global triumph of microcredit. A core aspect of the new neoliberal agenda was its emphasis on the need for all institutions in society to be financially self-sufficient and profit orientated. Subsidies and public investment were bad words. The heavily subsidised Grameen Bank-style microcredit industry clearly could not survive under the new neoliberal "selfsufficiency" paradigm. Led by USAid and the World Bank, the microcredit model was therefore extensively commercialised, privatised and liberalised. It was essentially developed into a for-profit private business model. Microcredit was turned into a business, but one imbued with a crucial social goal - poverty reduction. With this important change secured, the microcredit industry began a very rapid expansion. By the mid-2000s the model was being described as the most effective anti-poverty and "bottom-up" development intervention of all time. With support from both the left and the right of the political spectrum, the UN agreed to nominate 2005 as the UN Year of Microcredit. And then it all began to go horribly wrong. Foundations of sand The agreed catalyst for the rapid collapse in the legitimacy of the microcredit model was the initial public offering in 2007 of Mexico's largest microcredit bank, Banco Compartamos. This event exposed something quite shocking - a spectacular level of profiteering by senior managers and outside investors, yet no evidence of any reduction in poverty among its poor clients. This scandal proved to be the tip of the iceberg. It soon became clear that the microcredit model had effectively been taken over by greedy "social entrepreneurs", aggressive private banks and hard-nosed investors. With the door now open for genuinely balanced assessments of the microcredit model, the veracity of the accumulated evidence base justifying the concept was soon being challenged. It was quickly exposed as fundamentally flawed. Such was the fragility and weakness of the evidence that one major UK government-financed study concluded that the entire microcredit movement had effectively been constructed on "foundations of sand". Even worse, a number of spectacularly destructive boom-to-bust episodes began to break out in countries and regions where microcredit had reached critical mass. The legitimacy of the microcredit model as a poverty reduction instrument was effectively destroyed. In little more than 30 years, the microcredit concept had gone from being equated with Zorro, the mythical Mexican hero and friend of the poor and exploited, to being widely referred to as a Zombie policy. In other words a dead and rotten idea that nevertheless keeps rising from the grave to lumber into the village to terrorise the local population. How did it come to this? The modern microcredit movement was actually founded on a very fundamental misunderstanding. Yunus' uplifting claims were based on a far-reaching, and wrong, assumption. This was that the poor, especially women, could easily establish an informal microenterprise selling simple items and services to other poor individuals in the same community. Yunus's firm opinion was that so long as the poor could be helped to produce something, they could easily sell it. As he famously put it, a Grameen-type credit programme opens up the door for limitless self employment and it can effectively do it in a pocket of poverty amidst prosperity, or in a massive poverty situation. Unfortunately, Yunus had erred big-time on this. He had actually fallen victim to a long-disproved fallacy in economic history known as Says Law. This is the mistaken idea that "supply creates its own demand". As the late political economist Alice Amsden said, the problem in developing countries is not the supply of simple items that the poor need to survive, rather it is the lack of purchasing power required to actually buy needed items and services. Milford Bateman is the visiting professor of economics at Juraj Dobrila University of Pula, Croatia. From: http://tnaepaper.co.za/DRIVE/main%20edition/06012016/epaperpdf/16.pdf -- -- You are subscribed. This footer can help you. Please POST your comments to [email protected] or reply to this message. 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