While microcredit is sometimes portrayed as a simple but complete solution, it's important to remember that there are other factors other than a lack of loans holding people, and specifically entrepreneurs back from suddenly striking it rich. While microcredit may help people boost their already existing businesses or start up a new business, other factors may be at play. For example, thinking back to the dosa women in "The Economic Lives of the Poor," a lack of specialization and an overabundance of similar businesses may be some of the issues involved in the lower levels of success of microfinance than hoped for. If new entrepreneurs don't understand concepts such as specialization, we can't expect the returns on their loans to be as great as we might hope. Pairing these loans with some basic business training may help to alleviate some of these issues. Overall, though, despite the fact that the results of microfinance might seme like a letdown, the fact that developing nations are simply getting access to some trustworthy financial institutions is a step in the right direction. One phrase in this aritcle that I found especially striking was: "What microcredit may do, they argue, is not transform lives, but simply ameliorate them, giving poor people a more affordable source for credit, and one that, unlike some moneylenders, will not resort to physical violence if someone can’t repay." If microfinance makes investment a little easier, a little safer, and a little more secure, it may shape people's future economic actions for the overall good.
As I read this article, my idea of the impact of microcredit went back in forth, as I kept debating whether or not I should believe the studies out by the MIT professors and economists. I believe that microcredit is a incredibly helpful way to breathe life into the economy in developing countries. While they might be tiny breaths, I feel like microcredit will help in the long-run. As the studies showed that microcredit did not "translate into gains for the borrowers, as measured by indicators like income, spending, health," I feel like the article said that the study wasn't looked at in a long enough period. For a in these indicators, I feel like it would have to be measured in the long-term, which is not yet possible to do. I do agree with the article microcrediting dpes"ameliorates" peoples lives, as they were making just enough to get by now. The question that I can't answer about this article is, as well as probably thousands or millions of other people can't either is As people get these small loans, will they actual be able to profit enough to make a difference in the economy?
I do though think that idea for giving loans and investments in medium-sized business is a very good idea, as I see this having a more impact or a faster and more measurable impact in the short-run and long-run than giving say 39 cents to someone. Think this might be a better option to jumpstart the economy.
1) I think they should take a second look back at this research to see if any long term effects appear. The articles cited used only about a 1 1/2 to 2 year time period. I dont really think thats enough to see any trickling effects.
2) Perhaps it is silly to expect widespread change in every aspect of life. After all...a loan is just a loan...its not a miracle pill. It may be too much to hope that micro finance will improve health, education, national income, etc.
3) I dont think any of this research provides a good reason to completely stop micro finance. People love to lend money to the poor...so why not let them do it? Better to change the lives of a few than none at all.
When I began reading this article, I was wondering if my faith in microfinance was going to diminish. Luckily it did not. In the case of this article, I still agree with these microlending companies that their efforts are still making a difference. Even if it is only a few people at a time over a long period, the end of poverty in regions has to start somewhere.
And this article also tries to make the point that alot of these impoverished lendees are only going to pile up debt and never pay it back. Is it really that bad though when the author also points out that these are wall street companies lending money and that most people will borrow less that $100. Additionally poor countries have way more petty entrepeneurs than wealthy countries.
Ultimately though it is hard to measure the impact of microlending and there is very little measure of how well they are stemming poverty in areas. Nevertheless, I dont think this article has convinced me that microfinance is a bad thing. I still believe it can only help people that are much worse off than any of us are. As Tyler Cowen says in the article, "The fact that microfinance has survived commercially, I take that more seriously than any other piece of evidence."
This article touches on many topics that we are discussing in class from gender issues to cultural value issues. It is easy to get caught up in the hype of microlending by just following the success stories of entreprenuers receiving money throuhg microlending. Many of these recipients of microlending are starting their own small businesses but new research is showing that these businesses might not be so successful. The real issue with microlending is actually a "macro" problem. These local entreprenuers are often just making enough to get by. Women are still being discriminated against in developing countries and values like saving money are not at the top of the list for many of these people. A lot of the money being made is being spent to pay off debt or to purchase goods that aren't essential for the household. The enconmists working for MIT's Jameel Poverty Action Lab notice that "mini" lending could be more useful in these countries to help pull larger sums of people above the poverty line. This could mean creating medium size businesses that allow for more labor and higher rates of involvement. Many of these entrepreneurs are working alone and firing workers in oder to keep the money for themselves. Lending more money to create larger businesses will help move a community out of poverty rather than giving just a few people enough to get by.
I'd like to see these papers...I wonder what sort of attempts they make at measuring qualitative, VALUE-based benefits (or consequences) of micro-finance. Of course, every idea needs to be challenged and this criticism will ultimately improve micro-finance.
My immediate reaction is that you can't expect to win the battle against poverty, poor gender relations, and weak infrastructure in a year and a half. Of course all of this has not changed in what is relatively "over night." I don't mind that many of the borrowers are taking the loans to buy "big-ticket items," which is ironic in itself because their big-ticket items are things like a t.v. when in the U.S., big-ticket items are houses and cars. It doesn't matter to me because it's not hurting anyone as long they're paying back the loan, and microlending does not just achieve aims like this. Though quantitatively, it does not appear (YET) that it has pulled everyone out of poverty, we can see the gains it has made with our own eyes, and eventually, maybe the numbers will reflect this also.
It seems that in this article some major issues are brought to light concerning the effectiveness of micro-finance. I found it particularly interesting that upon further review, there was little difference in the power of women in the household, and going even further men seemed to be the only one's benefitting from these micro-loans. To further understand this discrepancy it may be necessary to know the amount of schooling each house hold head has achieved to understand the power relationship. I think the fact that household consumption rarely changes as a result of micro-loans is because micro-loans are largely being reinvested into small businesses, set aside as savings for possible future lump-sum purchases (weddings, TVs, etc.), or being used to pay of high interest loans.
I also feel that some of the studies carried out attempting to quantify the effectiveness of micro-loans did not allow a long enough time table to see the true benefits reaped via micro-loans. Perhaps if a 3-5 year time span was given, the results would show increased consumption in the form of private investment along with seeing a larger number of the abjectly poor being freed from debt with staggering interest rates.
At the end of the piece, the author points out how a factory of 40 workers will obviously be more productive than 40 individual entrepreneurs. I believe there is an important point here. Micro-financing, as it evolves, needs to target aid towards small businesses, where small loans can allow great investment to occur, creating a positive multiplier resulting in significant growth that can ultimately spread throughout a community. Here the gains will change from now simply being able to "get by" to increased income, well-being, and capability.
Before I read this article, I expected to end up with a much more negative opinion of microfinance than I did. The article doesn't really say that there are many negative outcomes from microfinance, but just that it hasn't solved poverty or any of the gender issues the way some people make it out to have. I think it is unrealistic to expect that these loans, which are almost all under $100, can have THAT big of an effect on poverty. The fact that there are any positive outcome from the loans, which there have proven to be, makes it worthwhile in my opinion.
That being said, I think a lot of people have brought up good points about needing to focus on small businesses that have a greater capacity to generate profit. This can hopefully evolve from the current microfinancing, which can act as a starting point. I also find microfinance too new of a field and the studies done in the article too short for the article to really give an accurate portrait of the long term effects of microfinance.
This article does a good job of giving you the "other side of the story." I think good points are made by both the proponents of microfinance and those against it. It was interesting that the researchers pointed out that the people who benefitted the most from the loans were the males that already had their own business, and not the women. The examples from the video we watched on the first day would have made me think otherwise. Also, it makes sense that they point out that a lot of times the loans may not be used appropriately (i.e. laying off employees, paying off old debts, spending on "temptation goods," etc.). If the loans are just handed out, and the people have no financial guidance, then I could definitely see this happening. However, with proper assistance, I feel like the small loans really could make a significant positive difference for many households.
These findings are quite disheartening. What I do not understand is why go through the trouble of proving that something like microcredit is ineffective, without providing an alternative solution? Its simply fighting against poverty alleviation. I strongly agree with the fact that the microfinance industry's existence and successes should be taken as proof of its beneficial effects. Regardless of whether or not the work can be DIRECTLY linked to developmental growth, it is irrefutable that the availability of capital is important to an individual's economic capabilities, which in turn do have a long term impact on overall developmental growth. All in all, I am discouraged that economists are spending time and money to prove that microfinance is ineffective, rather than investing their energy in a complementary solution to the issue,
Despite the conclusions discussed in this article, I feel like they leave out one important aspect of microcredit that has to be discussed. Many of these impoverished peoples, especially in 'third-world type' countries are highly downtrodden and often live in abusive households. One effect of these microloans that hasn't been mentioned in the article is the psychological and cultural impact they can often have. Women can often gain a greater sense of important, self-worth and autonomy as they are potentially able to control some finances even in highly paternalistic societies. Furthermore, despite the researchers claim that these microcredit loans result in little eradication of poverty, their effect on these individuals quality of life is undeniable. If one person is able to buy and utilize the productive capability of a cow, then the loan has been a success, at least in my opinion. I will concede the fact that these loans probably do little (in most cases) to truly lift families out of real poverty, but in terms of giving families access to greater mobility, these loans prove extremely valuable.
I, like the first poster, noticed this statement: "What microcredit may do, they argue, is not transform lives, but simply ameliorate them, giving poor people a more affordable source for credit, and one that, unlike some moneylenders, will not resort to physical violence if someone can’t repay."
That right there made me stop taking the article as seriously. I personally think no longer living under the constant fear of physical violence if you default on a loan is a pretty damn life transforming situation.
Lack of credit without doubt is an important cause and characteristic of poverty, as also mentioned in “Economic Lives of the Poor”. Most poor do not have access to credit or even if they do they pay very high rates of interest which then puts them in a poverty trap due to inability to pay back the interest let alone the principal payment. Microcredit is attacking this one link in the vicious chain of poverty. The article says; “Part of the appeal of microcredit lies in its suggestion that the world’s slums are populated not by helpless victims of global forces, but eager entrepreneurs lacking only a $30 loan to start a business and pull themselves out of poverty.” I do not agree with the claim. Microcredit does not implicitly assume that all the poor are entrepreneurs even though it does help them a lot. In my opinion microcredit is a form of social safety net, a form of social insurance that allows people to spread their risk during bad times. Lack of credit during a bad economic situation can drag a family or individual into poverty but access of credit at the crucial moment can prevent it. Take for instance, a bad crop year for the farmer, due to insufficient rainfall that season he has no crops to sell and hence no money to feed his family. If that year he could get a small to get by and meet his needs, next year he will get back to his normal form of business. However, if that year there is no credit available he is very likely to fall in the vicious cycle of poverty. In this case the money is not necessarily being borrowed to start a business but simply to augment the expenditure of the house. The farmer is using microcredit as a form of insurance that is helping him spread his risk and securing him in bad time. In the good times, he can pay back the money and go back to his business. In my opinion, microcredit is not only a source of credit for the entrepreneurial poor but it is also a form of safety net and social insurance for the vulnerable. And as Esther Duflo said, it is like any other financial instrument; it is useful but not a miracle drug to poverty. However, it plays an important role in breaking the chain of poverty. In the long run we still need other economic and social changes to counter poverty.
Here is another interesting paper by Rohini Pande and Robin Burgess that estimates significant reductions in poverty due to rural bank extension programs in India:
As long as the business is getting along on an appropriate cycle, I would rather say that there is nothing for small changes to be blamed at. More important than that is the sustainability of microfinance, as well as improvements in the systems. In the process of making the client lists, the main concern for the bank would be the borrowers' purpose of financing (as mentioned in the article), because I thought the main purpose for the bank was to support new entrepreneurs, not their consumption in other goods. Therefore, the bank should define its policy (criteria) for lending the money, and also investigating possibilities of success in borrowers' business.
Simultaneously, I am worried about what would happen after many business launches, for certain number of entrepreneur might have to leave markets when it grows competitive. As a matter of possibility, it might be the same as lending money to stay for a night in Las Vegas, since there are no "sureness" in businesses.
Related to this article, I would also like to point out about the "social cash transfer", which is operated by UNICEF, in Malawi. This project is targeted for households which do not pocess any workforce and living under $1 per day (defined as ultra-poor), "offering" cash to support their purchase in daily commodities. For sure, there are many objections to this scheme, however, I believe it must be one of the most intriguing part of development economics.
Details about social cash transfer: http://www.socialcashtransfers-malawi.org/
I agree with a majority of the prior posts in two overall conclusions : 1. I want to know more about these papers, any measures of long term effect and specific processes they used for their studies, and 2. my faith that microcredit can improve the economic lives of the poor is not dismantled.
It was very interesting to read about an opposing view of microfinance, because the majority of articles and media outlets shed a positive light on the subject. I agree that microfinance is a seemingly solid approach to increasing access to credit in low-income communities without pouring government money and resources into the problem. I do think, however, that there are certain pitfalls along the road to successful microfinance enterprises that were not necessarily addressed in the article. This summer I worked at a non-profit loan fund where 20% of our portfolio was dedicated toward loans to microfinance funds. I had an opportunity to sit down with a man who was raising capital for his organization's sixth fund, and it was a great conversation about the current state/health of microfinance. It's interesting to learn that the microfinance industry is beginning to experience it's own credit bubble burst, and that specific countries (currently Nicaragua) are considered more risky to invest in at certain times, typically because of government dissent.
Also from my experience this summer, I took interest in an idea brought up at the conclusion of the article that perhaps some of these loans should shift from being $100s or less to loans closer to $10,000. Loans of this size, more often made to non-profit organizations and not to individual people for startup businesses, have the capability to make a larger impact across communities. This aspect of community development and building infrastructure can be overlooked with small loans to specific people or business ventures.
I tend to be biased in favor of micro-finance, 1. because it hasn't been shown to have a negative effect, and 2. because it is a commercially viable method for many institutions to provide credit to individuals who otherwise wouldnt have any.
At first I thought that this article might turn me away from this, but I found it did not.
One key point in the article was that even using the alternative research in evaluating recipients of these loans, there did not seem to be any significant harm to anyone through this process. If a policy doesn't hurt anyone, and is commercially viable, why not continue?
Another interesting idea that the article brought up was the possibility of increasing the savings rate as a more viable method of reducing poverty and establishing some form of insurance. Instead of banks that purely loan out money to the poor, perhaps what they (the impoverished) really need is simple access to a checking account.
1)While the research methodology is undoubtably incomplete on some level, the results should be accepted. If microfinance is not what Yunus paints it as, the microfinance industry should adjust: less emphasis on loans and more on savings. The Catholic Church was one of the first western NGOs in the microfinance business and after extensive research, they only provide savings programs.
2) From a capability perspective, access to credit is basic functioning for living in a capitalistic society. Access to credit allows people around the world to experience western capitalism for what it is and start to embrace or reject it as a system.
I think that the article brought up several important points and limitations of microfinance to date. I do not think that these findings are either positive or negative. At this point, microfinance has not been overly successful in solving poverty, rather, it mostly helps to alleviate debt. I think that the problems stems from people giving one donation and expecting everything to be solved. The donations need to be continuous so that these people have continual access to funding until they are fully able to support themselves and help their economy grow.
As almost everyone has pointed out, the article does not state that there are any negative affects of microfinance-- it just states that evidence shows microfinance is not the solution to end poverty. Evidence may not show large increases in income because of micro loans, but I think we have to look at other ways to measure an increase in well-being-- somewhat like using the Human Development Index instead of a GDP per capita measure for development. I think that providing inidividuals with credit lines that they otherwise would not have provides them the freedom to make financial decisions-- which in itself is very empowering. An inidividual may decide to invest in their business, pay off debt, spend on household expenditures, etc.... and if they then are able to pay the loan back I believe it was a success. Also, to be able to borrow money without fear of violent repercussions would seem to increase ones feeling of safety and security, and thus over all well being. The data suggests that according to data men have higher returns from microfinance; however it ignores the statistics that we have addressed in class that show women are more likely to pay the loan back. Therefore, for the number of successful male entrepreneurs, a large number of them default on their loans as well. After reading articles that suggest women's spending habits are beneficial to the whole family (individuals besides herself), I still believe that giving the money to women has better benefits.
This article points out that it is very possible that microfinance is effective, but it can not create development on its own. It is the only way for poor entrepreneurs to start businesses, but those sorts of businesses will not drive large-scale growth alone. The papers suggest that the key to development is raising incomes, which would not come from small start-up businesses without many employees, but from large institutions that hire high numbers of low skilled workers. These types of firms would create jobs in developing countries if the climate (meaning government, policies, stability, etc) presented a less risky environment for foreign direct investment. It is this FDI that would drive significant development alongside the poorer entrepreneurs who require micro lending.
This is an overly pessimisic view of microcredit. First, the researchers only looked at a 1-2 year window. This is clearly not enough time to see how these businesses grow. Many microloans take a year to simply be paid off, and profits would then increase after. Second, the article says savings would be a more efficient way of investment than microcredit for the poor. But as we talked about in class, savings is not always an option. If the poor hide their money it could still be stolen, and they can not open a bank account. And Third, the article talked about how the borrowers did not increase household spending, did not increase education, healthcare, etc. This made me think of Sen's definition of freedom, the freedom of choice. The freedom to choose is an result of these loans. Maybe the poor don't spend on what development economists think they should, but they have the choice to. If banks desire their borrowers to increase household expenditures, possibly they could include a mandatory class to teach their clients about benefits of healthcare, education, etc.
If more educated and more experienced economists than myself (which is practically everyone in this class and definitely includes the authors of this article and the publishers of the studies referred to in the article) claim that the average affect of microlending is "weak , if not nonexistent", than I, like James must affect the validity of their findings. However, like most of the posters, I do not discount the values of microlending. There is a place for microfinance in alleviating poverty. We just can't depend solely on microlending to pull everyone everywhere out of poverty. (Just like we can't depend on any one policy or initiative of any kind to completely eradicate Third World poverty.)
I am inclined to agree with Duflo: “I don’t see this as a negative finding,” she says. When asked why she thinks microcredit didn’t boost health and education outcomes, she says, “I would really ask the question, ‘Why did we expect all these things to happen?’ If you give people access to a financial instrument, it’s like any other instrument. It’s useful, but it’s not like the miracle drug to end poverty.”
We cannot really expect microcredit to be the end all, be all poverty cure. Like several of the other posters said, I think this critique of microfinance can be used to improve microlending in the developing world. Also, as long term results become more available, we will know how microlending is helping in the long term. (One and a half to two years is clearly not long enough to judge of the overall value of micro loans in the battle against poverty.) "What these countries don’t have enough of are the kinds of steady jobs that more reliably raise incomes, and the sort of enterprises, often quite large, that provide them." Maybe the shift from micro to mini loans would provide these steady jobs and the stability associated with them.
So microfinance isn't the penicillin for poverty we would like it to be. But it's still tylenol -- it doesn't cure everything, but it helps a lot of things a little. And I'm not about to just throw out all my Tylenol.
While microcredit is sometimes portrayed as a simple but complete solution, it's important to remember that there are other factors other than a lack of loans holding people, and specifically entrepreneurs back from suddenly striking it rich. While microcredit may help people boost their already existing businesses or start up a new business, other factors may be at play. For example, thinking back to the dosa women in "The Economic Lives of the Poor," a lack of specialization and an overabundance of similar businesses may be some of the issues involved in the lower levels of success of microfinance than hoped for. If new entrepreneurs don't understand concepts such as specialization, we can't expect the returns on their loans to be as great as we might hope. Pairing these loans with some basic business training may help to alleviate some of these issues.
ReplyDeleteOverall, though, despite the fact that the results of microfinance might seme like a letdown, the fact that developing nations are simply getting access to some trustworthy financial institutions is a step in the right direction. One phrase in this aritcle that I found especially striking was: "What microcredit may do, they argue, is not transform lives, but simply ameliorate them, giving poor people a more affordable source for credit, and one that, unlike some moneylenders, will not resort to physical violence if someone can’t repay." If microfinance makes investment a little easier, a little safer, and a little more secure, it may shape people's future economic actions for the overall good.
As I read this article, my idea of the impact of microcredit went back in forth, as I kept debating whether or not I should believe the studies out by the MIT professors and economists. I believe that microcredit is a incredibly helpful way to breathe life into the economy in developing countries. While they might be tiny breaths, I feel like microcredit will help in the long-run. As the studies showed that microcredit did not "translate into gains for the borrowers, as measured by indicators like income, spending, health," I feel like the article said that the study wasn't looked at in a long enough period. For a in these indicators, I feel like it would have to be measured in the long-term, which is not yet possible to do.
ReplyDeleteI do agree with the article microcrediting dpes"ameliorates" peoples lives, as they were making just enough to get by now.
The question that I can't answer about this article is, as well as probably thousands or millions of other people can't either is As people get these small loans, will they actual be able to profit enough to make a difference in the economy?
I do though think that idea for giving loans and investments in medium-sized business is a very good idea, as I see this having a more impact or a faster and more measurable impact in the short-run and long-run than giving say 39 cents to someone. Think this might be a better option to jumpstart the economy.
Hmm... a few thoughts.
ReplyDelete1) I think they should take a second look back at this research to see if any long term effects appear. The articles cited used only about a 1 1/2 to 2 year time period. I dont really think thats enough to see any trickling effects.
2) Perhaps it is silly to expect widespread change in every aspect of life. After all...a loan is just a loan...its not a miracle pill. It may be too much to hope that micro finance will improve health, education, national income, etc.
3) I dont think any of this research provides a good reason to completely stop micro finance. People love to lend money to the poor...so why not let them do it? Better to change the lives of a few than none at all.
When I began reading this article, I was wondering if my faith in microfinance was going to diminish. Luckily it did not. In the case of this article, I still agree with these microlending companies that their efforts are still making a difference. Even if it is only a few people at a time over a long period, the end of poverty in regions has to start somewhere.
ReplyDeleteAnd this article also tries to make the point that alot of these impoverished lendees are only going to pile up debt and never pay it back. Is it really that bad though when the author also points out that these are wall street companies lending money and that most people will borrow less that $100. Additionally poor countries have way more petty entrepeneurs than wealthy countries.
Ultimately though it is hard to measure the impact of microlending and there is very little measure of how well they are stemming poverty in areas. Nevertheless, I dont think this article has convinced me that microfinance is a bad thing. I still believe it can only help people that are much worse off than any of us are. As Tyler Cowen says in the article, "The fact that microfinance has survived commercially, I take that more seriously than any other piece of evidence."
This article touches on many topics that we are discussing in class from gender issues to cultural value issues. It is easy to get caught up in the hype of microlending by just following the success stories of entreprenuers receiving money throuhg microlending. Many of these recipients of microlending are starting their own small businesses but new research is showing that these businesses might not be so successful. The real issue with microlending is actually a "macro" problem. These local entreprenuers are often just making enough to get by. Women are still being discriminated against in developing countries and values like saving money are not at the top of the list for many of these people. A lot of the money being made is being spent to pay off debt or to purchase goods that aren't essential for the household. The enconmists working for MIT's Jameel Poverty Action Lab notice that "mini" lending could be more useful in these countries to help pull larger sums of people above the poverty line. This could mean creating medium size businesses that allow for more labor and higher rates of involvement. Many of these entrepreneurs are working alone and firing workers in oder to keep the money for themselves. Lending more money to create larger businesses will help move a community out of poverty rather than giving just a few people enough to get by.
ReplyDeleteI'd like to see these papers...I wonder what sort of attempts they make at measuring qualitative, VALUE-based benefits (or consequences) of micro-finance.
ReplyDeleteOf course, every idea needs to be challenged and this criticism will ultimately improve micro-finance.
My immediate reaction is that you can't expect to win the battle against poverty, poor gender relations, and weak infrastructure in a year and a half. Of course all of this has not changed in what is relatively "over night." I don't mind that many of the borrowers are taking the loans to buy "big-ticket items," which is ironic in itself because their big-ticket items are things like a t.v. when in the U.S., big-ticket items are houses and cars. It doesn't matter to me because it's not hurting anyone as long they're paying back the loan, and microlending does not just achieve aims like this. Though quantitatively, it does not appear (YET) that it has pulled everyone out of poverty, we can see the gains it has made with our own eyes, and eventually, maybe the numbers will reflect this also.
ReplyDeleteIt seems that in this article some major issues are brought to light concerning the effectiveness of micro-finance. I found it particularly interesting that upon further review, there was little difference in the power of women in the household, and going even further men seemed to be the only one's benefitting from these micro-loans. To further understand this discrepancy it may be necessary to know the amount of schooling each house hold head has achieved to understand the power relationship. I think the fact that household consumption rarely changes as a result of micro-loans is because micro-loans are largely being reinvested into small businesses, set aside as savings for possible future lump-sum purchases (weddings, TVs, etc.), or being used to pay of high interest loans.
ReplyDeleteI also feel that some of the studies carried out attempting to quantify the effectiveness of micro-loans did not allow a long enough time table to see the true benefits reaped via micro-loans. Perhaps if a 3-5 year time span was given, the results would show increased consumption in the form of private investment along with seeing a larger number of the abjectly poor being freed from debt with staggering interest rates.
At the end of the piece, the author points out how a factory of 40 workers will obviously be more productive than 40 individual entrepreneurs. I believe there is an important point here. Micro-financing, as it evolves, needs to target aid towards small businesses, where small loans can allow great investment to occur, creating a positive multiplier resulting in significant growth that can ultimately spread throughout a community. Here the gains will change from now simply being able to "get by" to increased income, well-being, and capability.
Before I read this article, I expected to end up with a much more negative opinion of microfinance than I did. The article doesn't really say that there are many negative outcomes from microfinance, but just that it hasn't solved poverty or any of the gender issues the way some people make it out to have. I think it is unrealistic to expect that these loans, which are almost all under $100, can have THAT big of an effect on poverty. The fact that there are any positive outcome from the loans, which there have proven to be, makes it worthwhile in my opinion.
ReplyDeleteThat being said, I think a lot of people have brought up good points about needing to focus on small businesses that have a greater capacity to generate profit. This can hopefully evolve from the current microfinancing, which can act as a starting point. I also find microfinance too new of a field and the studies done in the article too short for the article to really give an accurate portrait of the long term effects of microfinance.
This article does a good job of giving you the "other side of the story." I think good points are made by both the proponents of microfinance and those against it. It was interesting that the researchers pointed out that the people who benefitted the most from the loans were the males that already had their own business, and not the women. The examples from the video we watched on the first day would have made me think otherwise. Also, it makes sense that they point out that a lot of times the loans may not be used appropriately (i.e. laying off employees, paying off old debts, spending on "temptation goods," etc.). If the loans are just handed out, and the people have no financial guidance, then I could definitely see this happening. However, with proper assistance, I feel like the small loans really could make a significant positive difference for many households.
ReplyDeleteThese findings are quite disheartening. What I do not understand is why go through the trouble of proving that something like microcredit is ineffective, without providing an alternative solution? Its simply fighting against poverty alleviation. I strongly agree with the fact that the microfinance industry's existence and successes should be taken as proof of its beneficial effects. Regardless of whether or not the work can be DIRECTLY linked to developmental growth, it is irrefutable that the availability of capital is important to an individual's economic capabilities, which in turn do have a long term impact on overall developmental growth. All in all, I am discouraged that economists are spending time and money to prove that microfinance is ineffective, rather than investing their energy in a complementary solution to the issue,
ReplyDeleteDespite the conclusions discussed in this article, I feel like they leave out one important aspect of microcredit that has to be discussed. Many of these impoverished peoples, especially in 'third-world type' countries are highly downtrodden and often live in abusive households. One effect of these microloans that hasn't been mentioned in the article is the psychological and cultural impact they can often have. Women can often gain a greater sense of important, self-worth and autonomy as they are potentially able to control some finances even in highly paternalistic societies. Furthermore, despite the researchers claim that these microcredit loans result in little eradication of poverty, their effect on these individuals quality of life is undeniable. If one person is able to buy and utilize the productive capability of a cow, then the loan has been a success, at least in my opinion. I will concede the fact that these loans probably do little (in most cases) to truly lift families out of real poverty, but in terms of giving families access to greater mobility, these loans prove extremely valuable.
ReplyDeleteI, like the first poster, noticed this statement:
ReplyDelete"What microcredit may do, they argue, is not transform lives, but simply ameliorate them, giving poor people a more affordable source for credit, and one that, unlike some moneylenders, will not resort to physical violence if someone can’t repay."
That right there made me stop taking the article as seriously. I personally think no longer living under the constant fear of physical violence if you default on a loan is a pretty damn life transforming situation.
Does microcredit work?
ReplyDeleteLack of credit without doubt is an important cause and characteristic of poverty, as also mentioned in “Economic Lives of the Poor”. Most poor do not have access to credit or even if they do they pay very high rates of interest which then puts them in a poverty trap due to inability to pay back the interest let alone the principal payment. Microcredit is attacking this one link in the vicious chain of poverty. The article says; “Part of the appeal of microcredit lies in its suggestion that the world’s slums are populated not by helpless victims of global forces, but eager entrepreneurs lacking only a $30 loan to start a business and pull themselves out of poverty.” I do not agree with the claim. Microcredit does not implicitly assume that all the poor are entrepreneurs even though it does help them a lot. In my opinion microcredit is a form of social safety net, a form of social insurance that allows people to spread their risk during bad times. Lack of credit during a bad economic situation can drag a family or individual into poverty but access of credit at the crucial moment can prevent it. Take for instance, a bad crop year for the farmer, due to insufficient rainfall that season he has no crops to sell and hence no money to feed his family. If that year he could get a small to get by and meet his needs, next year he will get back to his normal form of business. However, if that year there is no credit available he is very likely to fall in the vicious cycle of poverty. In this case the money is not necessarily being borrowed to start a business but simply to augment the expenditure of the house. The farmer is using microcredit as a form of insurance that is helping him spread his risk and securing him in bad time. In the good times, he can pay back the money and go back to his business. In my opinion, microcredit is not only a source of credit for the entrepreneurial poor but it is also a form of safety net and social insurance for the vulnerable. And as Esther Duflo said, it is like any other financial instrument; it is useful but not a miracle drug to poverty. However, it plays an important role in breaking the chain of poverty. In the long run we still need other economic and social changes to counter poverty.
Here is another interesting paper by Rohini Pande and Robin Burgess that estimates significant reductions in poverty due to rural bank extension programs in India:
http://ideas.repec.org/p/bri/cmpowp/04-104.html
- Aparajita Singh
As long as the business is getting along on an appropriate cycle, I would rather say that there is nothing for small changes to be blamed at. More important than that is the sustainability of microfinance, as well as improvements in the systems. In the process of making the client lists, the main concern for the bank would be the borrowers' purpose of financing (as mentioned in the article), because I thought the main purpose for the bank was to support new entrepreneurs, not their consumption in other goods. Therefore, the bank should define its policy (criteria) for lending the money, and also investigating possibilities of success in borrowers' business.
ReplyDeleteSimultaneously, I am worried about what would happen after many business launches, for certain number of entrepreneur might have to leave markets when it grows competitive. As a matter of possibility, it might be the same as lending money to stay for a night in Las Vegas, since there are no "sureness" in businesses.
Related to this article, I would also like to point out about the "social cash transfer", which is operated by UNICEF, in Malawi. This project is targeted for households which do not pocess any workforce and living under $1 per day (defined as ultra-poor), "offering" cash to support their purchase in daily commodities. For sure, there are many objections to this scheme, however, I believe it must be one of the most intriguing part of development economics.
Details about social cash transfer:
http://www.socialcashtransfers-malawi.org/
I agree with a majority of the prior posts in two overall conclusions : 1. I want to know more about these papers, any measures of long term effect and specific processes they used for their studies, and 2. my faith that microcredit can improve the economic lives of the poor is not dismantled.
ReplyDeleteIt was very interesting to read about an opposing view of microfinance, because the majority of articles and media outlets shed a positive light on the subject. I agree that microfinance is a seemingly solid approach to increasing access to credit in low-income communities without pouring government money and resources into the problem. I do think, however, that there are certain pitfalls along the road to successful microfinance enterprises that were not necessarily addressed in the article. This summer I worked at a non-profit loan fund where 20% of our portfolio was dedicated toward loans to microfinance funds. I had an opportunity to sit down with a man who was raising capital for his organization's sixth fund, and it was a great conversation about the current state/health of microfinance. It's interesting to learn that the microfinance industry is beginning to experience it's own credit bubble burst, and that specific countries (currently Nicaragua) are considered more risky to invest in at certain times, typically because of government dissent.
Also from my experience this summer, I took interest in an idea brought up at the conclusion of the article that perhaps some of these loans should shift from being $100s or less to loans closer to $10,000. Loans of this size, more often made to non-profit organizations and not to individual people for startup businesses, have the capability to make a larger impact across communities. This aspect of community development and building infrastructure can be overlooked with small loans to specific people or business ventures.
I tend to be biased in favor of micro-finance, 1. because it hasn't been shown to have a negative effect, and 2. because it is a commercially viable method for many institutions to provide credit to individuals who otherwise wouldnt have any.
ReplyDeleteAt first I thought that this article might turn me away from this, but I found it did not.
One key point in the article was that even using the alternative research in evaluating recipients of these loans, there did not seem to be any significant harm to anyone through this process. If a policy doesn't hurt anyone, and is commercially viable, why not continue?
Another interesting idea that the article brought up was the possibility of increasing the savings rate as a more viable method of reducing poverty and establishing some form of insurance. Instead of banks that purely loan out money to the poor, perhaps what they (the impoverished) really need is simple access to a checking account.
I have two thoughts on this article.
ReplyDelete1)While the research methodology is undoubtably incomplete on some level, the results should be accepted. If microfinance is not what Yunus paints it as, the microfinance industry should adjust: less emphasis on loans and more on savings. The Catholic Church was one of the first western NGOs in the microfinance business and after extensive research, they only provide savings programs.
2) From a capability perspective, access to credit is basic functioning for living in a capitalistic society. Access to credit allows people around the world to experience western capitalism for what it is and start to embrace or reject it as a system.
I think that the article brought up several important points and limitations of microfinance to date. I do not think that these findings are either positive or negative. At this point, microfinance has not been overly successful in solving poverty, rather, it mostly helps to alleviate debt. I think that the problems stems from people giving one donation and expecting everything to be solved. The donations need to be continuous so that these people have continual access to funding until they are fully able to support themselves and help their economy grow.
ReplyDeleteAs almost everyone has pointed out, the article does not state that there are any negative affects of microfinance-- it just states that evidence shows microfinance is not the solution to end poverty. Evidence may not show large increases in income because of micro loans, but I think we have to look at other ways to measure an increase in well-being-- somewhat like using the Human Development Index instead of a GDP per capita measure for development. I think that providing inidividuals with credit lines that they otherwise would not have provides them the freedom to make financial decisions-- which in itself is very empowering. An inidividual may decide to invest in their business, pay off debt, spend on household expenditures, etc.... and if they then are able to pay the loan back I believe it was a success. Also, to be able to borrow money without fear of violent repercussions would seem to increase ones feeling of safety and security, and thus over all well being.
ReplyDeleteThe data suggests that according to data men have higher returns from microfinance; however it ignores the statistics that we have addressed in class that show women are more likely to pay the loan back. Therefore, for the number of successful male entrepreneurs, a large number of them default on their loans as well. After reading articles that suggest women's spending habits are beneficial to the whole family (individuals besides herself), I still believe that giving the money to women has better benefits.
This article points out that it is very possible that microfinance is effective, but it can not create development on its own. It is the only way for poor entrepreneurs to start businesses, but those sorts of businesses will not drive large-scale growth alone. The papers suggest that the key to development is raising incomes, which would not come from small start-up businesses without many employees, but from large institutions that hire high numbers of low skilled workers. These types of firms would create jobs in developing countries if the climate (meaning government, policies, stability, etc) presented a less risky environment for foreign direct investment. It is this FDI that would drive significant development alongside the poorer entrepreneurs who require micro lending.
ReplyDeleteThis is an overly pessimisic view of microcredit. First, the researchers only looked at a 1-2 year window. This is clearly not enough time to see how these businesses grow. Many microloans take a year to simply be paid off, and profits would then increase after. Second, the article says savings would be a more efficient way of investment than microcredit for the poor. But as we talked about in class, savings is not always an option. If the poor hide their money it could still be stolen, and they can not open a bank account. And Third, the article talked about how the borrowers did not increase household spending, did not increase education, healthcare, etc. This made me think of Sen's definition of freedom, the freedom of choice. The freedom to choose is an result of these loans. Maybe the poor don't spend on what development economists think they should, but they have the choice to. If banks desire their borrowers to increase household expenditures, possibly they could include a mandatory class to teach their clients about benefits of healthcare, education, etc.
ReplyDeleteIf more educated and more experienced economists than myself (which is practically everyone in this class and definitely includes the authors of this article and the publishers of the studies referred to in the article) claim that the average affect of microlending is "weak , if not nonexistent", than I, like James must affect the validity of their findings. However, like most of the posters, I do not discount the values of microlending. There is a place for microfinance in alleviating poverty. We just can't depend solely on microlending to pull everyone everywhere out of poverty. (Just like we can't depend on any one policy or initiative of any kind to completely eradicate Third World poverty.)
ReplyDeleteI am inclined to agree with Duflo: “I don’t see this as a negative finding,” she says. When asked why she thinks microcredit didn’t boost health and education outcomes, she says, “I would really ask the question, ‘Why did we expect all these things to happen?’ If you give people access to a financial instrument, it’s like any other instrument. It’s useful, but it’s not like the miracle drug to end poverty.”
We cannot really expect microcredit to be the end all, be all poverty cure. Like several of the other posters said, I think this critique of microfinance can be used to improve microlending in the developing world. Also, as long term results become more available, we will know how microlending is helping in the long term. (One and a half to two years is clearly not long enough to judge of the overall value of micro loans in the battle against poverty.) "What these countries don’t have enough of are the kinds of steady jobs that more reliably raise incomes, and the sort of enterprises, often quite large, that provide them." Maybe the shift from micro to mini loans would provide these steady jobs and the stability associated with them.
So microfinance isn't the penicillin for poverty we would like it to be. But it's still tylenol -- it doesn't cure everything, but it helps a lot of things a little. And I'm not about to just throw out all my Tylenol.