Blog Post Archive

Microfinance doesn't work

Jason Hickel:

"What’s so fascinating about the microfinance craze is that it persists in the face of one unfortunate fact: microfinance doesn’t work. Of course, there are some lovely anecdotes out there about the transformative power of micro-loans, but as David Roodman from the Center for Global Development put it in his recent book, “The best estimate of the average impact of microcredit on the poverty of clients is zero.” This is not a fringe opinion. A comprehensive DFID-funded review of extant data comes to the same conclusion: the microfinance craze has been built on “foundations of sand” because “no clear evidence yet exists that microfinance programmes have positive impacts.”

In fact, it turns out that microfinance usually ends up making poverty worse. The reasons for this are fairly simple. Most microfinance loans are used to fund consumption – to help people buy the basic necessities they need to survive. In South Africa, for example, consumption accounts for 94% of microfinance use. As a result, borrowers don’t generate any new income that they can use to repay their loans so they end up taking out new loans to repay the old ones, wrapping themselves in layers of debt.

When micro-loans are used to fund new businesses, budding entrepreneurs tend to encounter a lack of consumer demand. After all, their potential customers are poor and low on cash, and what little money they do have gets spent on basic goods that tend already to be available. In this context, new businesses end up displacing already-existing ones, yielding no net increase in employment and incomes. And that’s the best of the likely outcomes. The worst – and much more likely – is that the new businesses fail, which then leads, once again, to vicious cycles of over-indebtedness that drive borrowers even further into poverty.

This demand-side problem can be stated quite simply: poor people don’t have enough money. Apparently we need expensive research studies to point this out.

The only consistent winners in the microfinance game are the lenders, many of whom charge exorbitant interest rates that sometimes reach up to 200% per annum (as in the case of Banco Compartamos). In the past we would have called such people loan sharks, but today they’re called microfinance providers, and they crown themselves with the moral halo that this term carries. Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people.

The failure of microfinance is recognised at even the highest levels, and yet for some reason it retains its staying power, like a zombie that refuses to die. Why is microfinance such a resilient idea? Because it promises an elegant, win-win solution to the problem of poverty. It assures us that we – the rich world – can eradicate poverty in the global South without any cost to us, and without any threat to existing arrangements of political and economic power. In other words, it promises revolution without the messiness of class struggle. And, what is more, it promises that we can help save the poor while making money from it. It’s an irresistible tale. It’s also a very effective tool of political control. Milford Bateman, one of the most compelling critics of microfinance, points out that the movement had its roots in the US government’s “containment strategy” in Latin America. The idea was to prevent people from subscribing to leftist movements by reframing poverty not as a political problem, but as a private problem. Microfinance became a powerful way of casting the poor as responsible for bootstrapping themselves out of poverty: all you need is a bit of gumption and some credit, and you should do just fine – if you fail, you have no one to blame but yourself.

It’s the neoliberal development strategy par excellence. Forget about colonialism, structural adjustment, austerity, financial crises, land grabs, tax evasion, and climate change. Forget about challenging the concentration of power and wealth. And, above all, forget about collective mobilisation. Bankers shall be our new heroes and debt our salvation. Debt, incidentally, is a great way to keep people docile.

If we expand our view to encompass the actual causes of poverty, it becomes clear that microfinance just won’t do. Structural problems require structural solutions. What might this look like? We could start by democratising the World Bank and the IMF, renegotiating trade agreements, clamping down on capital flight, rebuilding labour rights, and so on. If we want to eliminate poverty, rich countries and rich individuals are going to have to feel the pinch – there’s no way around it. Unfortunately, the missionaries of microfinance are unlikely to be happy about this.

This is not to say that we should abolish microfinance altogether, but simply that microfinance will never work until we address the background conditions that produce poverty in the first place. We also need to set up the right systems for small businesses to succeed, such as strong subsidies, state assistance, and welfare support to prop up entrepreneurs when they fail – the very systems that neoliberalism has convinced us to abandon.

There’s also a much more immediate solution we could try. Why not just give money to the poor, for free? A growing body of evidence suggests that direct cash transfers, with no strings attached, not only deliver success where microfinance fails, they appear to be the single most impactful anti-poverty intervention available. Experiments with basic income grants have been conducted in Namibia, Mexico, South Africa, Indonesia, and elsewhere, all with astonishingly good results. They smooth out consumption deficits, improve health indicators, and allow people to start small businesses that are successful because they can take advantage of increased local demand.

The beauty of this approach is not just that it actually works; it also brings about a fundamental change of attitude toward the poor. It treats them not as hopeless victims to be pitied with charity, nor as sources of potential value for a rapacious financial sector, but rather as human beings with an innate right to the wealth that we draw from our planet’s common resources." (http://therules.org/microfinance-usually-ends-up-making-poverty-worse/)

Beyond the Gig Economy: The Trend towards Full-Employment Startups

Farhood Manjoo:

"“Fundamentally what it boiled down to was that we had to create good jobs to make sure that our operators were vested in our company,” said Saman Rahmanian, a co-founder of Managed by Q, a start-up that provides commercial cleaning and supply services.

Of course, creating “good jobs” entails costs. Managed by Q’s workers get an “above market” wage, plus full medical benefits. “They are the same benefits that our programmers and engineers get,” Mr. Rahmanian said, because “we didn’t want to create a company that had a divide between people that worked in headquarters and the others.”

Munchery, a dinner delivery service, pays drivers a base wage that exceeds the minimum wage, plus their driving expenses, plus tips. Taken together, it comes out to about $23 an hour in San Francisco, far higher than most other delivery jobs. Those who work more than 30 hours a week also get health and retirement benefits.

Beepi’s auto mechanics and delivery people get an above-market salary, overtime pay and medical benefits. MoveLoot, a start-up that sells and delivers used furniture, also provides above-market wages and benefits to its workers.

And at Enjoy, which began operating in San Francisco and New York this spring, delivery experts are paid either a full-time or part-time salary, not a per-customer fee. Mr. Johnson declined to specify the salary, but he said that it was above what workers at high-end technology retailers might make — meaning around $40,000 to $50,000 a year. Enjoy’s employees are also given benefits like health coverage and retirement plans, and they even get stock in the company.

This week, Instacart, a grocery delivery company that is one of the largest and most successful on-demand companies, announced that beginning with its operations in Boston and Chicago, it will shift the independent contractors who now pick groceries in its stores to part-time employee status. (Workers who drive for the company will remain contractors.)

Instacart’s new employee plan is for part-time workers only, according to a company spokeswoman. Workers will not be able to schedule more than 30 hours a week, the threshold that would require them to receive health coverage." (http://www.nytimes.com/2015/06/25/technology/personaltech/start-ups-finding-the-best-employees-are-actually-employed.html)

How do you abolish the wages system by degrees?

Tom Walker:

“Step one: Do not forget. Marx advised not to forget that in everyday struggles you are fighting with effects, not with the causes of those effects. Not forgetting requires a lot of attention to history. It also requires a keen awareness that there is a well-funded industry devoted to making us forget.

Step two: Our own accounting. Standard double-entry bookkeeping looks at profit and loss from the perspective of the business enterprise whose purpose is defined as monetary profit seeking. Making a profit is not the purpose of people or of nations.Labor is not a commodity. Labor power is a common-pool resource.

Step three: Build (or transform) organizations dedicated to not forgetting and our own accounting. The model for this is a hybrid that borrows both from traditional trade unionism and from common-pool resource management. The precedents are there. What needs to be done is to synthesize from those experiences.

Step four: Bargain collectively. Collective bargaining is not synonymous with the administrative model of bargaining established under the Wagner Act. Eric Hobsbawm, for example, called the Luddite actions "collective bargaining by riot." Theodore Ave-Lallemant wrote an obscure article nearly a hundred years ago in which he distinguished between the collective labor contract based on cooperation and the more standard form of contract bargaining which "seeks no more than to stipulate the terms of individual contracts of employment."

Step five: Work less. The wages system is effectively abolished in each hour workers collectively withdraw from the labor supply. Limitation of the hours of work is abolition of the wages system by degree. This explains why employers have fought so tenaciously for two centuries against the reduction of working time.” (http://econospeak.blogspot.com/2015/06/szalamitaktika-how-do-you-abolish-wages.html)