Wednesday, December 09, 2015

Capitalism cannot solve poverty - No microfinance “revolution”

 Microcredit has grown into a $60-billion-plus industry reaching 200 million borrowers worldwide despite limited evidence that it actually achieves its goals. Microcredit rose to prominence in the 1990s thanks to the success of the Grameen Bank, a Bangladeshi community development bank founded by economist and social entrepreneur Muhammad Yunus. In 2006, Yunus and the bank were jointly awarded the Nobel Peace Prize “for their efforts to create economic and social development from below.” By then, the model had spread to dozens of countries on six continents; supporters hailed microcredit as a key step in achieving Yunus’s vision of “a world without poverty.”

Jonathan Morduch, a respected New York University economist, once called small loans “one of the most promising and cost-effective tools in the fight against global poverty.” A series of six independently conducted randomized controlled trials found that a variety of microlending programs had little to no effect on participants’ income or financial well-being. None of the six studies found statistically significant increases in household income or spending. Four of the six found no change in food consumption; one found a modest increase and the sixth found a significant decrease.

Morduch now says that the studies, along with earlier research that reached similar conclusions, suggest that the impacts of microcredit have been, at a minimum, “overhyped.” Some critics even claim that microcredit left the poor worse off by saddling them with debt. News reports went so far as to link suicides in India to the stress of struggling to pay back microloans. The studies find no evidence that borrowers are, on average, hurt by the loans. But they don’t appear to be helped much either. “The takeaway is that there is not much of an effect,” said Esther Duflo, a Massachusetts Institute of Technology economist who was a co-author of one of the studies. “It doesn’t lead to the massive transformation in their quality of life. That’s not to mean that it’s useless, certainly not to mean that it’s hurtful … [but] it’s not the life-changing tool that it was presented to be.”