The tenth post in this blog series singled out microfinance, and financial inclusion in general, as the “money pump” that powers market-based poverty reduction programs. Whether the specifics of the program involves generating additional income, improving skills, adopting new technologies for mitigating and adapting to climate change, strengthening homes against natural disasters, or building resilience, the beneficiaries of these programs are often encouraged to borrow, save, and insure themselves in order to achieve these goals. And due to the weak statistical link between financial inclusion and increased income and resilience, many critics blame financial services for being inappropriately designed, poorly delivered, or expensive.
This is like blaming umbrellas for the rain. Microfinance works as it was envisioned half a century ago when USAID first floated the idea of providing credit to farmers and the poor on commercial terms, and thirty years ago a World Bank staff member and two former USAID staff members developed the rationale and outlined the operational guidelines for modern microcredit. The intervening decades have largely proven these thought leaders correct. Commercially-oriented and profitable financial service providers have replaced costly and poorly-performing subsidized loans by public banks and development programs. They have added products and services, transforming microcredit into microfinance with the addition of savings and insurance, and transforming it further into financial inclusion with the addition of payments, transfers, and digital financial services. Many different scalable operational models have been developed and replicated around the world, and they have successfully expanded outreach: today, 76% of adults in the world have access to an account, a 50% increase compared to 2011, according to the World Bank’s Global Findex database.
Gaps still remain, of course. Women and people with disabilities are still disproportionately excluded, in part due to of the design of products and delivery channels for both traditional and digital services. In fact, many of the world’s poor still remain outside the financial system. However, except for people in very remote places that are difficult or expensive to serve, for the most part the problem is not due to a lack of access. Instead, it is due to a lack of awareness, a lack of bankability (limited income or business opportunities) or a lack of financial literacy. In other words, most of the remaining systemic barriers to financial inclusion are on the demand side rather than the supply side.
Yes, some people borrow too much and the interest rates are high. But the vast majority of clients use financial services appropriately and regularly. If they remain poor or vulnerable, it is not because of the financial services. Instead, the problem is the oversold belief that an investment can enable a small farm or micro-enterprise to grow to the point that it enables its owners to accumulate capital or assets and thereby escape poverty. It is the idea that reducing poverty, or addressing climate change, slowing migration, or a host of other problems can be solved if only the poor and vulnerable were more entrepreneurial or innovative.
This approach can indeed work for some, and their smiling faces regularly grace the accomplishment reports of financial institutions and the investors and development agencies that support them. However, it is not a systematic pathway out of poverty and vulnerability for most because the other parts of the system––size of enterprise, market structure, etc.––make it hard to accumulate capital, and because many farm and business owners are not entrepreneurial at all. Furthermore, it does nothing to address inequality; by leaving too many people behind, this approach exacerbates the poverty and vulnerability of everyone else. For a system based on mobilizing markets, it fails to understand how markets work: that there are power differences based on size, and because of this wealth concentrates unless there are countervailing measures.
As this blog series has shown, this approach to poverty reduction came out of a specific economic, social, and political context in the United States––one that sought to demonstrate a commitment to poverty reduction and equality without sacrificing anything tangible to achieve it.
To square that circle, they invented the concept of “investing” in the poor and combined it with magical thinking about the power of technology to solve human social problems. The results are plain to see. Even if the US economy overall creates more wealth than other advanced economies, exposing its citizens to market forces for public goods over the past forty years has done little for poverty reduction, equity, resilience, or even life expectancy.
This is not a bug in the US system, but a feature. The idea that inequality spurs competitive juices and pushes forward the technological frontier may sound like a convenient justification from those already living in the stratosphere, but this belief is held by a majority of upper- and middle-income Americans.
This is the model that has been exported to the Global South. Almost all development and poverty reduction programs today are based on the same principle—focused on enabling people to overcome their vulnerabilities through market-based transactions. Today, there are a plethora of social investors, social enterprises, and digital financial service providers offering solutions they say will include and empower the poor. The development community has raced to support them, including agencies from countries that would never subject their own citizens to markets to cope with the vulnerabilities of life.
With markets providing neither sufficient formal employment nor stability for small businesses and farms, many of the poor in the Global South choose to migrate. Even when the income differential is not that great, the regularity of income from employment overseas is the draw because it reduces financial unpredictability and thus vulnerability. How their families use the remittances they send home provides a window on the true priorities of low-income households in the Global South. In addition to supplementing consumption, remittances are used to pay for children’s school fees, medical care, and home improvement (or moving to a peri-urban area where decent education and medical care are accessible). They are also often used by the receiving families to get out of debt.
Education. Health care. Housing. In most advanced countries, these are subsidized or directly provided as a public service precisely so that citizens do not have to take on unsustainable debt in order to access the basic requirements of a modern life. These services, along with labor and consumer protection, public pensions, farm subsidies, and many other government interventions are the tools and institutions of social democracy that built and maintains the middle class in advanced economies.
In the Global South, in contrast, billions of dollars have been poured into offering people financial services rather than public services to achieve the same goals. Instead of building affordable education systems, health systems, and housing finance systems that we take for granted in our own countries, we insist that people use the market to obtain a decent education, or health insurance, or a pension––or their income. Along the way, we encourage them to borrow to be able to afford those things, which often loads them up with debt payments and exacerbates their inability to pay for life’s basic necessities.
Back in 1972 when the ILO, USAID, and World Bank first proposed shifting the development paradigm to focus on the grass roots, none of them elevated the private sector and the market to such a lofty role in reducing poverty because all of them located the central cause of poverty in local politics and market structures, with differentials in power driving unequal market outcomes. Their full recommendations for reducing poverty sought to overcome the monopoly on economic gains from market transactions by the politically and economically powerful through public programs and investments to redistribute wealth downward.
For fifty years, development agencies have avoided any discussion about using redistributive public programs to reduce vulnerabilities and raise the incomes of the poor. However, in the face of climate change, leaders in the development community already seem to recognize the limits to market-based solutions. Organizations such as the World Bank, Inter-American Development Bank, and USAID have recently published papers outlining their support for social protection policies––including cash transfers, public insurance, and public works-driven employment––to support the poor and vulnerable.
These recommendations are a sharp break from the left-leaning neo-liberal approach that increasingly drove economic development and poverty reduction policies over the past fifty years. Over that period, development policy has prioritized property over people and encouraged competition rather than cooperation. It has promoted growth without regard to the quality and distribution of that growth. Although many have benefitted, too many have been left behind to conclude that this approach systematically reduces poverty or vulnerability. In the face of looming climate change, this emphasis on individual initiative alone is inadequate to the task at hand. Poverty and vulnerability are social problems and a public responsibility, not something to be privatized.
***This is the final post in this blog series.***