Links. Microcredit (no), microsaving (yes) and the informal economy
Once upon a time I was, more or less subconscious, of the opinion that in the modern world ´inclusive growth´ was kind of natural.
It requires quite special circumstances to enable people to lift themselves out of poverty. ´Financial inclusion´ is surely not enough (ahem) and the ILO identifies eight different though interrelated circumstances which have to be positive to enable productivity increases (which we do need) to translate into inclusive growth. About this:
- Norbert Haering argues that micro credit is not the solution: `Muhammad Yunus and his Grameen Bank have received the Nobel Peace Prize on the promise of conquering poverty by giving poor people in poor countries access to debt. A whole industry of lending to the poor has developed from this. It is making its leading figures quite rich and is pushing many customers into misery and debt slavery´.
- Milford Bateman, in the Jacobin, argues the same thing: ´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.´
- According to McKinsey, differences in productivity and productivity growth in the Mexican formal and informal sector are indeed mind blowing:´Productivity has grown 5.8% a year in large modern firms but has fallen 6.5% a year in traditional firms. Small traditional firms were 28% as productive as large modern ones in 1999, 8% in 2009. Employees in traditional bakeries are 1/50th as productive as those in largest modern companies´
- The Guardian agrees agrees about micro credit, with a case study about South Africa (think also of AIDS): ´With few poor individuals possessing a secure income stream that might ensure full repayment of a microloan – unemployment is now higher than it was under apartheid – many of the poorest individuals have been forced to repay their microloan by selling off their household assets, borrowing from friends and family, as well as simply taking out new microloans to repay old ones. For far too many now “financially included” individuals in South Africa, using microcredit to support current spending has been a disastrous and irreversible pathway into chronic poverty. Going further, of the very small percentage of microcredit that actually does go into supporting income-generating microenterprises (as per the original model), the fact remains that the business activities that emerge are simply not the drivers of sustainable development and poverty reduction. The rafts of new street traders, barrow boys, spaza shops and the like have generated very little, if any, positive impact in South Africa’s poorest local communities.´
- LOCAL microcredit (no: according to an ILO report microsavings) systems do however work, in South Africa: ´Funerals are a major life-cycle expense for poor South African households as in other parts of the world In the Grahamstown township, the study site of this paper, located in the poorest province of South Africa, households sampled spent approximately 15 times their average monthly household income on a funeral. … One common means of funding funerals is through funeral insurance. A myriad of formal and informal insurers compete to sell funeral insurance to low income South Africans. While the workings of formal funeral insurers are well known, those of informal funeral insurers have barely been documented although, in some townships, they cover more people than formal insurers. There are two main types of informal insurance schemes. The first type operates on a for-profit basis. This type of scheme is typically run by the owners of funeral parlours who sell insurance as a means of selling their relatively expensive products to low income households. The funeral parlours administrate their own informal insurance products. The second type of informal insurance scheme is a not-for-profit scheme that shares many of the features of ROSCAs, rotating savings and credit associations.´
- The ILO, too, stresses the problems with the informal sector: ´The majority of workers in the informal economies of Africa, Asia and Latin America can be characterized as the working poor and suffer from multiple vicious cycles of poverty and vulnerability which perpetuate their low skills, low productivity employment, and low income working lives. … When applied to the informal economy, the concept of productivity should be used with consideration …. Of particular concern is that women’s contribution to productivity in the informal economy is being overlooked, largely due to the nature and the near invisibility of their work. For the vast majority of the working poor, more work unless it is more productive work will not lead out of poverty; hence the need to raise productivity levels. Eight main (interrelated) approaches are usually taken to increase productivity in the informal economy, namely improvements in: work practices; market access; human capital; social capital; infrastructure; firms fixed capital; farm/non-farm dynamics; and the enabling policy and institutional environment.´