[Reader-list] To add tuppence to the micro credit debate

[Monica Narula]

Posting this not to deny Yunus his glory or to agree with Hashmi, but  
there is more to things than the binary...

best
M

MICROCREDIT, MACRO PROBLEMS
Walden Bello*

[Published on Sunday, October 15, 2006, by The Nation. This article  
can be found on the web at http://www.thenation.com/doc/20061030/bello]

The awarding of the Nobel Peace Prize to Muhammad Yunus, regarded as  
the father of microcredit, comes at a time when microcredit has  
become something like a religion to many of the powerful, rich and  
famous. Hillary Clinton regularly speaks about going to Bangladesh,  
Yunus's homeland, and being "inspired by the power of these loans to  
enable even the poorest of women to start businesses, lifting their  
families--and their communities--out of poverty."

Like the liberal Clinton, the neocon Paul Wolfowitz, now president of  
the World Bank, has also gotten religion, after a recent trip to the  
Indian state of Andhra Pradesh. With the fervor of the convert, he  
talks about the "transforming power" of microfinance: "I thought  
maybe this was just one successful project in one village, but then I  
went to the next village and it was the same story. That evening, I  
met with more than a hundred women leaders from self-help groups, and  
I realized this program was opening opportunities for poor women and  
their families in an entire state of 75 million people."

There is no doubt that Yunus, a Bangladeshi economist, came up with a  
winning idea that has transformed the lives of many millions of poor  
women, and perhaps for that alone, he deserves the Nobel Prize. But  
Yunus--at least the young Yunus, who did not have the support of  
global institutions when he started out--did not see his Grameen Bank  
as a panacea. Others, like the World Bank and the United Nations,  
elevated it to that status (and, some say, convinced Yunus it was a  
panacea), and microcredit is now presented as a relatively painless  
approach to development. Through its dynamics of collective  
responsibility for repayment by a group of women borrowers,  
microcredit has indeed allowed many poor women to roll back pervasive  
poverty. However, it is mainly the moderately poor rather than the  
very poor who benefit, and not very many can claim they have  
permanently left the instability of poverty. Likewise, not many would  
claim that the degree of self- sufficiency and the  ability to send  
children to school afforded by microcredit are indicators of their  
graduating to middle-class prosperity. As economic journalist  Gina  
Neff notes, "after 8 years of borrowing, 55% of Grameen households   
still aren't able to meet their basic nutritional needs -- so many  
women are using their loans to buy food rather than invest in business."

Indeed, one of those who have thoroughly studied the phenomenon,  
Thomas Dichter, says that the idea that microfinance allows its  
recipients to graduate from poverty to entrepreneurship is inflated.  
He sketches out the dynamics of microcredit: "It emerges that the  
clients with the most experience got started using their own  
resources, and though they have not progressed very far--they cannot  
because the market is just too limited--they have enough turnover to  
keep buying and selling, and probably would have with or without the  
microcredit. For them the loans are often diverted to consumption  
since they can use the relatively large lump sum of the loan, a  
luxury they do not come by in their daily turnover." He concludes:  
"Definitely, microcredit has not done what the majority of  
microcredit enthusiasts claim it can do -- function as capital aimed  
at increasing the returns to a business activity."

And so the great microcredit paradox that, as Dichter puts it, "the  
poorest people can do little productive with the credit, and the ones  
who can do the most with it are those who don't really need  
microcredit, but larger amounts with different (often longer) credit  
terms."

In other words, microcredit is a great tool as a survival strategy,  
but  it is not the key to development, which involves not only  
massive capital-intensive, state-directed investments to build  
industries but also an assault on the structures of inequality such  
as concentrated land ownership that systematically deprive the poor  
of resources to escape poverty. Microcredit schemes end up coexisting  
with these entrenched structures, serving as a safety net for people  
excluded and marginalized by them, but not transforming them. No,  
Paul Wolfowitz, microcredit is not the key to ending poverty among  
the 75 million people in Andhra Pradesh.  Dream on.

Perhaps one of the reasons there is such enthusiasm for microcredit  
in establishment circles these days is that it is a market-based  
mechanism that has enjoyed some success where other market-based  
programs have crashed. Structural-adjustment programs promoting trade  
liberalization, deregulation and privatization have brought greater  
poverty and inequality to most parts of the developing world over the  
last quarter century, and have made economic stagnation a permanent  
condition. Many of the same institutions that pushed and are  
continuing to push these failed macro programs (sometimes under new  
labels like "Poverty Reduction Strategy Papers"), like the World  
Bank, are often the same institutions pushing microcredit programs.  
Viewed broadly, microcredit can be seen as the safety net for  
millions of people destabilized by the large-scale macro- failures  
engendered by structural adjustment.

There have been gains in poverty reduction in a few places--like  
China, where, contrary to the myth, state-directed macro policies,  
not microcredit, have been central to lifting an estimated 120  
million Chinese from poverty.

So probably the best way we can honor Muhammad Yunus is to say, Yes,  
he deserves the Nobel Prize for helping so many women cope with  
poverty. His boosters discredit this great honor and engage in  
hyperbole when they claim he has invented a new compassionate form of  
capitalism -- social capitalism or "social entrepreneurship" -- that  
will be the magic bullet to end poverty and promote development.

* Walden Bello is professor of sociology and public administration at  
the University of the Philippines and executive director of Focus on  
the Global South.

Monica Narula
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