Friday, March 09, 2012

The Micro-credit Bubble

SOYMB has exposed it previously. The supposed capitalist miracle solution for 3rd World poverty. The idea was simple. Give a small loan to a poor woman in a poor nation. Watch her start a small business — whether hawking tomatoes or fattening goats — that puts her and her family on the first rung of a ladder that will elevate them out of poverty. Repeat the prescription across the planet. The World Bank bought into it, as have charity foundations and countless individual donors. Its appeal spanned the political spectrum, drawing in the Left with its promise to empower women in sexist societies and enticing the right with its emphasis on entrepreneurship and individual responsibility. Muhammad Yunus, its pioneer, was consequently awarded a Nobel Peace Prize in 2006.

There has been enough time and evidence now to determine microcredit's success. Microcredit rarely transforms lives. Some people do better after getting a small business loan, while some do worse. Poor people who take loans use them in different ways and with different outcomes. By luck or by pluck, some do well, and it is their stories, of course, that microcredit promoters tell.

But a question remained. If some households with higher borrowing also display higher earnings, can we really know which is causing which? Does credit make households less poor, or does being less poor make them more apt to borrow money in the first place? Development economists addressed this problem by experimenting with microcredit programs, randomly offering loans to some people and not others. Just as in the best drug trials, this has allowed researchers to measure cause and effect more precisely. If, one year later, those who randomly received loans earned more or enrolled more of their girls in school, what factor other than the loans could explain those happy outcomes?

The first randomized studies of microcredit appeared in 2009. MIT economists found that in the slums of Hyderabad, India, small loans caused more families to start micro-businesses such as sewing saris. Existing businesses saw higher profits. But over the 12 to 18 months the researchers tracked, the data revealed no change in bottom-line indicators of poverty, such as household spending and whether children were attending school. Perhaps those who made more from their own businesses earned less in wages outside the home. A study in Manila by American economists Dean Karlan and Jonathan Zinman also found no effect on poverty for families one to two years after they received a loan.

Microcredit schemes began to reveal themselves as financial bubbles — by popping, in places such as Nicaragua, Bosnia, Morocco and Pakistan. In Bosnia, for instance, the microloans outstanding shot from $275 million in 2005 to $1 billion in 2008, before slumping to $830 million in 2009 on defaults and write-offs. The proliferation of fast-growing microlenders had made it easy for poor men and women to get in over their heads in hundreds of dollars of debt. According to the Consultative Group to Assist the Poor, public and private investors committed a record $3.6 billion to the microfinance industry in 2010, with 86 percent devoted to financing microloans. One now wonders when and where the next bubble will pop.

These bubbles may be the first in history that was fed more by socially-minded charity than by selfish greed. But as they say, the road to hell is paved with good intentions!

Taken from here

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