The Power of a Dollar
Microcredit is nothing more than a socially validated way for financial elites to exploit the poor.
by Milford Bateman
Illustration by Lennard Kok
The new issue of Jacobin, centering on development and the Global South, is out now. To celebrate its release, new subscriptions start at only $14.95.
Thirty years ago the international development community was ecstatic. It had found the perfect market-affirming solution to poverty in developing countries: microcredit.
The popularizer of this new strategy — which consisted of providing small loans to the poor so they could launch self-employment ventures — was the US-trained Bangladeshi economist Muhammad Yunus, who portrayed microcredit as a panacea that would rapidly create an unlimited number of jobs and eradicate endemic poverty.
Yunus’s project of “bringing capitalism down to the poor” quickly turned him into the go-to-guy for advice on how best to address global poverty. In 1983, flush with funding, especially from US aid agencies and private foundations, Yunus established his own “bank for the poor” — the now-iconic Grameen Bank. Soon, Grameen clones, financed by the international donor community, sprang up across the Global South.
The microcredit movement was born. USAID and the World Bank were particularly supportive of the model, not least because they could now promote self-help and individual entrepreneurship — key components of the neoliberal capitalism both organizations were aggressively pushing at the time — on the basis of them being antidotes to poverty.
Neoclassical economists like Jeffrey Sachs also favored the microcredit model because it seemed to validate their economic development perspective, which was constructed on a foundation of individual entrepreneurship and market interaction. Sachs envisioned microcredit as a way of helping the poor escape their poverty by climbing what he termed the “ladder of development.”
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 across the political spectrum, the UN named 2005 the “year of microcredit.”
Microcredit also became one the few development policies known to, and supported by, ordinary people worldwide — a feat facilitated by the high-profile celebrities who supported the global effort, including Bill and Hillary Clinton, Bill Gates, Bono, Natalie Portman, and Matt Damon.
The movement reached its apotheosis in November 2006 at the Microcredit Summit in Halifax, Canada, an event that celebrated the progress to date while also extracting pledges from participants to ramp up the microcredit supply. With delegates bathing in the warm afterglow of the announcement some months earlier that Muhammad Yunus and the Grameen Bank would share the 2006 Nobel Peace Prize, there appeared to be nothing the model could not achieve.
Presenters argued that microcredit could positively impact health care, the environment, terrorism, and a whole host of other problems. Bernd Balkenhol, then head of the International Labour Organization’s Social Finance Unit, best encapsulated the movement zeitgeist when he described microcredit as “the strategy for poverty reduction par excellence.”
With ambitious expansion plans laid out, a future in which virtually every poor individual on the planet (especially women) could easily access microcredit appeared to be near. Also seemingly on the cusp of becoming reality were Yunus’s oft-repeated claims that microcredit would “eradicate poverty in a generation” and that our children would soon have to visit a “poverty museum” to see what all the fuss was about.
And then it all began to go horribly wrong.
The catalyst for the dramatic turn against microfinance was the Initial Public Offering (IPO) of Mexico’s largest microcredit bank, Banco Compartamos, in 2007. Here ordinary people learned not of microcredit’s impressive successes in reducing poverty in Mexico — there was and still is absolutely no evidence of this — but of the spectacular level of profiteering by senior managers and outside investors.
Most working in the microcredit sector were stunned by the sheer avarice of those involved. But “the Compartamos scandal” soon proved to be the tip of the iceberg. When numerous other instances of personal enrichment and unscrupulous behavior surfaced, it became clear that the microcredit model had essentially been taken over by greedy entrepreneurs, aggressive private banks, and hard-nosed investors.
At the same time, the veracity of the reports justifying the microcredit concept was increasingly being called into question. The evidence was so weak, in fact, that one major government-financed study in the United Kingdom concluded that the entire microcredit movement had been “constructed upon foundations of sand.” After a number of spectacularly destructive “boom-to-bust” episodes in all of the countries and regions where microcredit had reached critical mass, the previously rock-solid belief that microcredit helped the poor rapidly crumbled.
In little more than thirty years, the microcredit concept has 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, a dead and rotten idea that nevertheless keeps rising from the grave. How did it come to this?
Heightening Immiseration
The modern microcredit movement’s central problem is that it rests on a fundamental misunderstanding of economics. Yunus believed that the poor, and especially women, could establish an informal microenterprise and then sell basic goods and services to other poor people in the community.
This assumption was applied even in the poorest communities, where the poor (by definition) struggle to afford the simple items and services conducive to their basic survival. But Yunus thought that as long as the destitute could produce something, they could sell it. As he later famously put it, a “Grameen-type credit program 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 embraced a long-disproven fallacy known as Say’s law — the idea that supply creates its own demand. As the late economist Alice Amsden explained, the core problem in developing countries is not the supply of basic items, but the sheer lack of local demand (or purchasing power) required to pay for them. Even in the poorest communities, there are generally enough retail stores, street food outlets, basket makers for people to access — if they have the financial means to do so.
A local “demand constraint” underlies two of the main shortcomings associated with microcredit: displacement and exit. Displacement occurs when new jobs and incomes registered in one microcredit-supported enterprise are cancelled out by the decline in jobs and incomes in incumbent competitor microenterprises. Exit is the process whereby both new and existing microenterprises are forced to close, due to the additional supply of informal microenterprises operating in the same sector.
As David Storey, an expert on small business policy, points out, “the single most important fact to be borne in mind when implementing measures for smaller firms is the high death rate of such businesses.” The reality behind the microcredit hype is that the vast majority of those who took out a microloan to invest in some income-generating project ended up failing or else displacing other struggling informal microenterprises operating in the same sector.
Failure leads to personal over-indebtedness, the diversion of other income flows (remittances, pensions) into repaying the loan, the loss of family assets pledged as collateral (land, housing, vehicles), and humiliation, despair, and, in far too many cases, a descent into inescapable poverty.
Taken together, displacement and exit explain why the microcredit model brings little to no net increase in employment. In microcredit-saturated Bosnia, for example, all the early claims of massive job creation were transparently false because evaluators refused to take these issues into account.
Indeed, it is difficult to find any impact evaluations that factor in displacement and exit. In all too many cases, the desire to please the client — typically a microcredit partisan — has won out over any ethical or professional imperative to report reality.
Nonetheless, these obvious shortcomings also help explain why, as even longstanding supporters now acknowledge, there is no empirical evidence showing microcredit cuts poverty. As a rule, it simply boosts the rate of informal microenterprise entry, which is then followed by an equally high rate of displacement and exit, creating nothing more than an unproductive and wasteful local dynamic known as “churn” or “turbulence.”
As Mike Davis writes, artificially stimulating hyper-competition in developing countries’ local markets is not the way out of poverty and human suffering, but an increasingly ugly manifestation of it.
Another indication of the failure of microcredit is that in many developing countries, the poor no longer avail themselves of microloans for business ventures, knowing they will likely either struggle to make money, or else quickly fail. Instead, a growing number use microcredit to pay for much-needed consumption goods.
Borrowers hope to eventually repay the microloan, perhaps through some unexpected financial windfall or a rare spurt of business success. But in practice the poor increasingly take out larger and larger microloans — and very often more than one — simply to cover repayments due on previous microloans, a Ponzi-like dynamic referred to as “loan bicycling.” This in turn has helped push up individual over-indebtedness, which in a growing number of developing countries has reached staggering levels.
Microcredit is nothing more than a socially validated way for financial elites to exploit the poor.
by Milford Bateman
Illustration by Lennard Kok
The new issue of Jacobin, centering on development and the Global South, is out now. To celebrate its release, new subscriptions start at only $14.95.
Thirty years ago the international development community was ecstatic. It had found the perfect market-affirming solution to poverty in developing countries: microcredit.
The popularizer of this new strategy — which consisted of providing small loans to the poor so they could launch self-employment ventures — was the US-trained Bangladeshi economist Muhammad Yunus, who portrayed microcredit as a panacea that would rapidly create an unlimited number of jobs and eradicate endemic poverty.
Yunus’s project of “bringing capitalism down to the poor” quickly turned him into the go-to-guy for advice on how best to address global poverty. In 1983, flush with funding, especially from US aid agencies and private foundations, Yunus established his own “bank for the poor” — the now-iconic Grameen Bank. Soon, Grameen clones, financed by the international donor community, sprang up across the Global South.
The microcredit movement was born. USAID and the World Bank were particularly supportive of the model, not least because they could now promote self-help and individual entrepreneurship — key components of the neoliberal capitalism both organizations were aggressively pushing at the time — on the basis of them being antidotes to poverty.
Neoclassical economists like Jeffrey Sachs also favored the microcredit model because it seemed to validate their economic development perspective, which was constructed on a foundation of individual entrepreneurship and market interaction. Sachs envisioned microcredit as a way of helping the poor escape their poverty by climbing what he termed the “ladder of development.”
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 across the political spectrum, the UN named 2005 the “year of microcredit.”
Microcredit also became one the few development policies known to, and supported by, ordinary people worldwide — a feat facilitated by the high-profile celebrities who supported the global effort, including Bill and Hillary Clinton, Bill Gates, Bono, Natalie Portman, and Matt Damon.
The movement reached its apotheosis in November 2006 at the Microcredit Summit in Halifax, Canada, an event that celebrated the progress to date while also extracting pledges from participants to ramp up the microcredit supply. With delegates bathing in the warm afterglow of the announcement some months earlier that Muhammad Yunus and the Grameen Bank would share the 2006 Nobel Peace Prize, there appeared to be nothing the model could not achieve.
Presenters argued that microcredit could positively impact health care, the environment, terrorism, and a whole host of other problems. Bernd Balkenhol, then head of the International Labour Organization’s Social Finance Unit, best encapsulated the movement zeitgeist when he described microcredit as “the strategy for poverty reduction par excellence.”
With ambitious expansion plans laid out, a future in which virtually every poor individual on the planet (especially women) could easily access microcredit appeared to be near. Also seemingly on the cusp of becoming reality were Yunus’s oft-repeated claims that microcredit would “eradicate poverty in a generation” and that our children would soon have to visit a “poverty museum” to see what all the fuss was about.
And then it all began to go horribly wrong.
The catalyst for the dramatic turn against microfinance was the Initial Public Offering (IPO) of Mexico’s largest microcredit bank, Banco Compartamos, in 2007. Here ordinary people learned not of microcredit’s impressive successes in reducing poverty in Mexico — there was and still is absolutely no evidence of this — but of the spectacular level of profiteering by senior managers and outside investors.
Most working in the microcredit sector were stunned by the sheer avarice of those involved. But “the Compartamos scandal” soon proved to be the tip of the iceberg. When numerous other instances of personal enrichment and unscrupulous behavior surfaced, it became clear that the microcredit model had essentially been taken over by greedy entrepreneurs, aggressive private banks, and hard-nosed investors.
At the same time, the veracity of the reports justifying the microcredit concept was increasingly being called into question. The evidence was so weak, in fact, that one major government-financed study in the United Kingdom concluded that the entire microcredit movement had been “constructed upon foundations of sand.” After a number of spectacularly destructive “boom-to-bust” episodes in all of the countries and regions where microcredit had reached critical mass, the previously rock-solid belief that microcredit helped the poor rapidly crumbled.
In little more than thirty years, the microcredit concept has 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, a dead and rotten idea that nevertheless keeps rising from the grave. How did it come to this?
Heightening Immiseration
The modern microcredit movement’s central problem is that it rests on a fundamental misunderstanding of economics. Yunus believed that the poor, and especially women, could establish an informal microenterprise and then sell basic goods and services to other poor people in the community.
This assumption was applied even in the poorest communities, where the poor (by definition) struggle to afford the simple items and services conducive to their basic survival. But Yunus thought that as long as the destitute could produce something, they could sell it. As he later famously put it, a “Grameen-type credit program 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 embraced a long-disproven fallacy known as Say’s law — the idea that supply creates its own demand. As the late economist Alice Amsden explained, the core problem in developing countries is not the supply of basic items, but the sheer lack of local demand (or purchasing power) required to pay for them. Even in the poorest communities, there are generally enough retail stores, street food outlets, basket makers for people to access — if they have the financial means to do so.
A local “demand constraint” underlies two of the main shortcomings associated with microcredit: displacement and exit. Displacement occurs when new jobs and incomes registered in one microcredit-supported enterprise are cancelled out by the decline in jobs and incomes in incumbent competitor microenterprises. Exit is the process whereby both new and existing microenterprises are forced to close, due to the additional supply of informal microenterprises operating in the same sector.
As David Storey, an expert on small business policy, points out, “the single most important fact to be borne in mind when implementing measures for smaller firms is the high death rate of such businesses.” The reality behind the microcredit hype is that the vast majority of those who took out a microloan to invest in some income-generating project ended up failing or else displacing other struggling informal microenterprises operating in the same sector.
Failure leads to personal over-indebtedness, the diversion of other income flows (remittances, pensions) into repaying the loan, the loss of family assets pledged as collateral (land, housing, vehicles), and humiliation, despair, and, in far too many cases, a descent into inescapable poverty.
Taken together, displacement and exit explain why the microcredit model brings little to no net increase in employment. In microcredit-saturated Bosnia, for example, all the early claims of massive job creation were transparently false because evaluators refused to take these issues into account.
Indeed, it is difficult to find any impact evaluations that factor in displacement and exit. In all too many cases, the desire to please the client — typically a microcredit partisan — has won out over any ethical or professional imperative to report reality.
Nonetheless, these obvious shortcomings also help explain why, as even longstanding supporters now acknowledge, there is no empirical evidence showing microcredit cuts poverty. As a rule, it simply boosts the rate of informal microenterprise entry, which is then followed by an equally high rate of displacement and exit, creating nothing more than an unproductive and wasteful local dynamic known as “churn” or “turbulence.”
As Mike Davis writes, artificially stimulating hyper-competition in developing countries’ local markets is not the way out of poverty and human suffering, but an increasingly ugly manifestation of it.
Another indication of the failure of microcredit is that in many developing countries, the poor no longer avail themselves of microloans for business ventures, knowing they will likely either struggle to make money, or else quickly fail. Instead, a growing number use microcredit to pay for much-needed consumption goods.
Borrowers hope to eventually repay the microloan, perhaps through some unexpected financial windfall or a rare spurt of business success. But in practice the poor increasingly take out larger and larger microloans — and very often more than one — simply to cover repayments due on previous microloans, a Ponzi-like dynamic referred to as “loan bicycling.” This in turn has helped push up individual over-indebtedness, which in a growing number of developing countries has reached staggering levels.
