Development Economics

The Complexities of Poverty and Development Strategies

A recurring theme in this journal is the amount of self-criticism within the development community.  There is no shortage of critics of an academic mind to point out the flaws in an approach to development without offering a reasonable alternative.  One common criticism is that microfinance doesn’t really offer a sustainable long-term economic solution to the problem of poverty.  It is too focused on the individual and not enough on the big picture – what is good for the population as a whole.  Most micro-businesses will never grow to a meaningful size because the capital provided by microfinance is not enough to bring them to scale.  So, the reasoning goes, poor people are destined to amble along without actually making their financial situation any better, while the small and medium enterprises (SMEs) that actually create the jobs needed to move the needle on macroeconomic development and poverty alleviation are neglected. This critique is too simplistic.  For one thing, the argument that microfinance institutions operate at the expense of SME financing is a straw man.  It is true that there are a limited number of aid dollars in the world and allocation is a zero-sum game, but that is irrelevant here since the largest microfinance institutions are financially sustainable, raising money through unsubsidized loans at commercial rates, public equity, and their own operations. The World Bank, the IMF, and NGOs around the world do provide a lot of money for research, seed capital for smaller MFIs, and pilot programs for non-financial services.  But, for the most part, there is not much diversion of aid funding as a result of microfinance.  This is more of a gripe with how some critics frame their arguments.  The more important point is that there is a tendency among critics on both sides of the debate to ignore the complexities of the issues and create false tradeoffs in order to simplify the debate.  It is easier to argue in black and white than deal with shades of gray. (more…)

Development Economics

The "Entrepreneur Myth" Myth

Muhammad Yunus, the godfather of microfinance, contends that everyone is an entrepreneur.  And microfinance is about individual economic empowerment, built on the premise that credit is both a human right and a path to economic freedom.  This reading has been distorted by those who talk about the “entrepreneur myth,” which says that microfinance romanticizes the poor by pushing a false by-your-bootstraps narrative.  This narrative, in turn, undermines development by giving the poor something they don’t want – credit for a business – instead of something they need, which is steady employment.  This argument isn’t necessarily untrue, but it is irresponsibly oversimplified and demonstrates a lack of grounding in reality.   I want to discuss two articles that address this issue and use them to explain why this reading of microfinance is not only flawed, but is counterproductive in serving the poor. [caption id="attachment_1140" align="alignright" width="300" caption="Rational actors in the U.S."][/caption] The first one, titled “Romanticizing the Poor” from the Stanford Social Innovation Review, is a bit more difficult to refute, in part because I agree with the premise but not the logic, and also because I am intimidated by the fact that the author, Aneel Karnani, is an economics professor of South Asian descent and, I would have to assume, intellectually superior to me.  But I'll try.  The article is less a refutation of microfinance as a poverty alleviation strategy as it is a caution against the merits of market-based solutions in general.  According to Mr. Karnani, the poor are not rational actors when it comes to economic decision-making.  Therefore, the argument goes, it is misguided and potentially harmful to try to apply free-market strategies – like microfinance – when the spending behavior of the poor is irrational.  He highlights the fact that the poor spend a disproportionate amount of money on booze and cigarettes at the expense of healthcare and education (Nicholas Kristof’s most recent article discusses the same issue).  The poor are more prone to impulse buying, so introducing more money and more material product choices will just drive them deeper into debt:

Many advocates of market-based solutions to poverty view poor people as rational consumers who, if given more options, would make better choices—that is, choices that would increase their economic welfare. They see no problem with encouraging the poor to spend their already meager incomes on low-priority products and services. They further argue that the poor have the right to determine how to spend their limited income and are in fact the best judges of what is in their best interests.
I don’t dispute the truth of these statements, mostly because I haven't read the research.  I would say it's not unreasonable to say that adults should be treated like adults when it comes to making decisions about how they spend their money.  Either way, they are irrelevant to an argument against microfinance.  (more…)

Microfinance

Microenterprise to SME: A Thought Exercise Pt. II

This is the third post of a three-part series on small- and medium enterprises.  It is the second of a two-part post.

[caption id="attachment_831" align="aligncenter" width="400" caption="Enterpreneurship training with Negros Women for Tomorrow"][/caption] The other day I discussed six actions or programs a microfinance institution (MFI) can take to help clients convert their business from a micro-enterprise to a small- to medium enterprise (SME).  Today, I will cover the final six. (more…)

Microfinance

Microenterprise to SME: A Thought Exercise pt. I

This is the third post of a three-part series on small- and medium enterprises.  It is a two-part post. [youtube=http://www.youtube.com/watch?v=6Z66wVo7uNw] A month ago, I attended a conference in Manila sponsored by the Microfinance Council of the Philippine Islands.  I wrote briefly about the level of cooperation among the participants, but have yet to share what I learned.  The conference – titled “Operationalizing Social Performance Monitoring (SPM)” – brought together a dozen microfinance institutions (MFIs) and lenders from across the country to discuss best practices for focusing on the social mission.  In the microfinance world, theoretical solutions to problems, like how to focus on the poor and remain financially sustainable, are often incompatible with the nuanced realities on the ground.  This gathering offered a chance for MFIs to share what has worked and what has not, so that the microfinance community at large can be more effective at addressing poverty alleviation in the Philippines. The keynote speaker, Prof. Ron Chua, functioned more as a facilitator and moderator than a lecturer.  He asked the MFIs to present a specific social goal and discuss the measures each would take to achieve it.  One nameless participant set an organizational goal of transitioning 30% of existing clients from micro-enterprises to SME (small- to medium enterprise) within five years.  They presented a laundry list of programs designed to aid in this process.  The underlying assumption behind each of these measures is that financial services (microcredit) must be complemented by the provision of non-financial services, including business development and support services and integrated community development.  Provision of financial services alone is not enough to bring people out of poverty.  This exhaustive list addresses all of the key issues in moving a client out of poverty.  I will present the first six here, and the remained six in the next post. (more…)