Let Them Eat Microcredits
This may be hard to believe, but in the dreary masculine world of Third World economic development, fashions come and go with the frequency and hype of rising and dropping skirt lengths. We’ve seen import substitution, export promotion, rural integration, and privatization burst onto the scene, explode, backfire, and then fizzle. Usually not quite fast enough though. Inevitably, each craze lives on well past its usefulness—if in fact it ever had any—until the next fad comes along. But after a number of lackluster seasons with few appealing new styles, this year we’re all celebrating the fabulous new Muhammad Yunus collection, featuring Grameen Bank, microcredit, and “development from below.” Yunus, the founder of Grameen, received the Nobel Peace Prize last month as the Father of Microcredit.
Actually, our excitement for the Grameen Bank has been building for some time. This institution, based in Bangladesh, provides collateral-free microloans to poor people (usually women), allowing them to improve their microbusinesses and lift themselves out of the macropoverty that currently engulfs them. Grameen helps “the poorest of the poor” and this year has 6.67 million borrowers and 2,247 branches, covering nearly 90 percent of the villages in Bangladesh. Grameen microcredit has become a true trend, with replicated banks in Uganda, Zimbabwe, and Bolivia, among other places. The bank has also attracted the endorsement of USAID, the World Bank, Monsanto, Johnson and Johnson, Citigroup, the Gates Foundation, and the Rockefellers.
Holy cow! If you’re poor and you get a look at a lineup like that, you would be well advised to read the fine print. Here’s how it works: Grameen makes microloans, in amounts from $50 to $200, to groups of borrowers, typically five women. Two of the five women use these initial loans to improve their microbusinesses: microkiosks, microgardens, microrepair, micro-etc. Bank staff and other members of the group keep a sharp eye on the way they use the money. If they begin to repay the loan over the next six weeks, at an interest rate of 16 percent (or higher), the other three women in the group then become eligible for loans. Peer pressure, in effect, becomes collateral. Grameen reports astounding repayment rates—upwards of 95 percent. Thus the polite applause from the approving rich people.
Unfortunately for the promoters and the clients of Grameen, however, the bank has had little impact on poverty. With nearly universal coverage of the villages in Bangladesh, the country still has the highest poverty rate in South Asia—nearly 138 million poor. Fifteen percent of the population are seriously malnourished, and Bangladesh still lacks even rudimentary social services throughout most of the country.
Of course, it isn’t realistic to expect that a single nongovernmental organization, or even a large commercial bank, could single-handedly address and diminish poverty on a national scale over a couple of decades, is it? But astonishingly, this is exactly what Grameen and boosters such as Kofi Annan and Paul Wolfowitz, the UN Secretary General and the World Bank President respectively, claim for it. The hype is amazingly grandiose: “Lasting peace cannot be achieved unless large population groups find ways in which to break out of poverty. Microcredit is one such means. Development from below also serves to advance democracy and human rights,” states the Grameen Web site.
“A small loan, a savings account, an affordable way to send a pay-cheque home, can make all the difference to a poor or low-income family. With access to microfinance, they can earn more, build up assets, and better protect themselves against unexpected setbacks and losses. They can move beyond day-to-day survival towards planning for the future. They can invest in better nutrition, housing, health, and education for their children. In short, they can break the vicious cycle of poverty.” Kofi adds, inaugurating the “UN Year of Microcredit.” Paul Wolfowitz chimes in, addressing the Father of Microcredit: “It was with great joy that I learned today that the Nobel Peace Prize has been awarded to you and the Grameen Bank. Your commitment to microcredit and poverty reduction in Bangladesh has had an enormous impact. Likewise, Grameen’s strong support for the role of women and poor people in the economy and society over the past 30 years is now global best practice.”
However, the Grameen method is simply not all it’s cracked up to be. Microcredit, as others have pointed out, does not break “the vicious cycle of poverty.” Rather, it allows people to subsist in it a little better for a little longer. This, in itself, is of course a major achievement, but let’s be honest. Grameen does not actually address the needs of “the poorest of the poor.” The poorest people do not have microkiosks, bamboo businesses, or bicycle repair shops. They have the clothes on their backs and a handful of mealie-meal if they’re lucky. There are roughly a billion of them, according to the UN and the World Bank, and Grameen never gets near them.
In addition, if you are a microbusiness owner, a $50 loan is never going to make you a macrobusiness owner. It isn’t even going to make you a normal-sized business owner. You are stuck being a teeny business owner forever, and here’s why. Let’s zoom in on, say, rural Guyana, an unfortunate former English colony on the north coast of South America, where a group of about five women stands in a sand pit outside a village. Between them, they have a couple of five-foot-square tattered screens tacked to wood frames and propped up with sticks. It is about one hundred degrees, and the women don’t have much food or water because it no longer rains when it should. They do have a shovel or two with splintered handles and loose, rusty blades. Using this equipment, they are mining for gold. They spell each other pitching sand at the screens. The sand itself goes through the screens and the small gold nuggets drop to the ground. Once a week, a man comes out in a truck and buys the gold crumbs for a pittance. A $100 loan is going to get the women some new shovels and screens—it may help them through a couple of bad weeks when one or two of them are sick—but it’s not going to get them out of the pit. Microcredit doesn’t train you to do anything else or even to do what you’re doing more efficiently. It smoothes over the rough spots in what you’re already doing. Grameen provides no services: no marketing help, no education or training, no infrastructure. Why not? Because that stuff costs real money.
This is not to say that the Grameen method is worthless—only that it is a stopgap measure, useful until real change comes about. Mr. Yunus fully deserves recognition for helping a lot of people live a little more comfortably. The harm comes when the idea of microcredit is misapplied and appropriated as a panacea by those who ought to be responsible for really reducing poverty— like the World Bank and the world’s rich. Predictably, this is exactly what has happened.
As rich people became aware that you could lend to poor people and they would pay you back at high interest rates, they became increasingly interested in Grameen. You could almost hear their mental calculations, as the slot machines in their heads turned up matching fruits. The obvious question formed: If poor people pay back their loans, why not make money from them? This is a fashion whose time has come: If microcredit works, why not microfinance? Just think of it! We could make bigger fortunes than we already have! After all, poor people are used to paying exceedingly high interest rates. Why should they pay them to tacky middlemen in beat-up trucks when they could pay usurious interest directly to People Like Us?
Jackpot! Half a billion people with $100 loans, paying annual interest at—say—50 percent. Admittedly, these are cocktail napkin calculations, but this looks like a pantload of money to me. It’s not surprising that one of the advocates of microfinance is Pierre Omidyar, founder of eBay. This is a man who figured out that the rubbish in your attic is worth something and, using info tech, turned it into money. When he took eBay public, he got $10 billion.
The Internet and information technology generally are turning up great huge pots of money that were previously unreachable. Loans to the poor were not, shall we say, interesting 10 years ago because we couldn’t keep track of them—the paperwork alone was worth more than the loan. But with low-cost high tech, we can now keep Miss Lakshmi and her depressing cousin, Miss Vandaniya, in our sights all week long. We can even pay some poor people to keep track of the rest of them by giving them cell phones. Whoops, ‘scuse me. Lending them cell phones. According to the New Yorker, Stanley Fisher, former World Bank official, then president of Citigroup International, told his cronies that the Citigroup microfinance division would try to earn “a reasonable rate of return.” Some companies, he said, were making 40 to 50 percent on their microfinance investments. Now that is reasonable, don’t you agree?
In a casual conversation one afternoon at the Inter-American Development Bank, Enrique Iglesias, then bank president, let drop, “Around here, it’s a lot easier to talk about fighting poverty than it is to talk about redistribution.” Unfortunately for Enrique, Stanley, Bill, and Melinda, if anything is going to be done about poverty, we are going to have to talk about redistribution—of their money. Something is wrong when a few individuals are able to appropriate wealth equivalent to that of a micronation, dole it out in $50 dribs and drabs to the deserving poor, and then collect interest. Sounds too much like Marie Antoinette—also in style once again this year. Please notice, however, that the real queen is extinct. She got hers.
Speaking of getting theirs, the academics, unavoidably, have also rung in. Jonathan Morduch, professor at New York University, acknowledges that critics of microcredit and microfinance have a point. This kind of lending is not going to end poverty, but you can’t just sit around and wait for the revolution, he says. You have to make the world a little more livable now.
But this could be done more effectively without microcredit, microfinance, or revolution. It could be done with fairer tax systems, honest government, and a final abandonment of the claptrap about markets solving everything. That particular fashion is just plain ugly. Governments of “developing” countries need to tax their rich, tax international capital transactions, exact fair payments from foreign investors who extract their resources and exploit their people, and use the resulting public money to fund public social services decently. Governments of “developed” countries need to eliminate the morally corrupt means that allow corporations and the appallingly wealthy to escape taxes and move capital so easily from Mumbai to Malta to the Caymans to New York undetected and untaxed.
That’s how the citoyen toppled the royalty. They taxed the feudal lands out from under the feudal lords. Then, of course, they did—perhaps in a moment of irrational exuberance—cut off the queen’s head.
I’m so sorry, darlings, but someday, when the fashion shows are over, we will simply have to sit down for a little chit-chat about who deserves to get what.
A native of Houston, Beatrice Edwards now lives in Washington D.C.