Far from being a panacea, small loans add to poverty and undermine people by saddling them with unsustainable debt, argues anthropologist Jason Hickel
I ‘m always amazed at how many students show up each year in the classrooms of the London School of Economics, where I teach, quivering with excitement about microfinance and other bottom-of-the-pyramid development strategies. Like eager young missionaries, they feel they’ve stumbled upon the One Idea that is sure to save the world.
Would that it were true. 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.
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.
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
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). Microfinance has become a socially acceptable mechanism for extracting wealth and resources from poor people.
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
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 https://getbadcreditloan.com/payday-loans-nj/lodi/ 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.
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