The limits of microcredit

I always thought the whole fuss over microcredit as the panacea of development, back in 2005, was a bit silly – there’s never a silver bullet for something as complex as economic development. It’s remarkable how much some people want to believe in such cure-all interventions anyway. We as a species are pretty clever, but we’re not very wise, nor are we particularly good at thinking in terms of complex systems and interactions over distance or between multiple parties. But I digress.

Sometimes I also think that people who wish to design economic empowerment programs for the poor have a poor track record of picking historical or cross-cultural examples to learn from. So many programs are erroneously predicated on fundamentally Western beliefs about social structures – say, the persistent thought in community development programs a few years that a local mayor or group of elders could accurately represent the rest of the people in a town, which seems to draw on traditions of democratic representation in local government that exist in the West, but don’t always hold true in developing countries. (Of course it does in some places, but there are plenty of counterfactual examples as well.) And yet, when it came to microfinance, so many providers seem to have made exactly the opposite mistake, and ignored the fact that in Western systems of credit, some people are outright judged too “vulnerable” (i.e. uncreditworthy) to take out a loan, for fear that they won’t be able to repay. I certainly understand that it’s hard to judge someone’s creditworthiness in a low-income situation, and microfinance does indeed benefit many people who may have been unfairly excluded from traditional credit on the basis of their existing poverty. But that’s the point: just because microfinance is “for the poor,” doesn’t mean that it’s for everyone who’s poor.

Indeed, it’s been shown that the benefits of microcredit tend to accrue to borrowers who live right around the $1-a-day poverty line – not to the poorest of the poor, such as those who are too sick or old to work, or who are somehow kept outside of the cash economy for other reasons. This may seem like a rather cruel paradox – that people who may be most in need of additional capital are least likely to benefit from a microfinance intervention – but instead I think it speaks to the fact that it’s unusual to use market-based solutions, such as microcredit, for social protection. Hence the kerfuffle about Bush’s social security investment accounts around the same time. This seems like a broader and more accurate analogy than any belief that local government must inherently be representative, and it’s interesting that the dialogue around microfinance as the best economic solution for the poor (as a unified body) seemed to miss the nuances of credit’s function in more developed economies.  (Of course this is also a generalization, as there are surely some microfinance institutions who take these things into account, but the number of academic accounts that I’ve seen of microfinance’s shortcomings suggest that there are plenty which don’t.)