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Not Another Cure-All Pill for Poverty

Posted by Página do Microcrédito em 26 junho, 2007

By Josh Weissburg

What the poor need is options, not prescriptions.

The cover story of this summer’s Stanford Social Innovation Review hits like a bombshell: “Microcredit Misses Its Mark.” For the development-savvy, pro-market reader, the claim seems out of line. In the long, spotty history of development aid, isn’t microfinance, with its emphasis on entrepreneurship, grassroots action, and individual responsibility, the one thing we can safely be proud of?

Well, yes and no, says author Aneel Karnani (of the University of Michigan’s Ross School of Business). Karnani grants that microfinance produces well-documented social benefits, particularly for women. But, he argues, it does not cure poverty. Stable jobs do.

Karnani’s illustration is simple and effective: Compare a microfinance program that lends $200 to each of 500 women, so that each can buy a sewing machine, to a $100,000 loan to a single garment manufacturer with 500 employees. Which scenario is likely to create the most wealth for the poor? In the first case, each of the 500 women must pay off a high-interest loan while competing against each other in the same market. The traditionally financed big business can exploit economies of scale and efficient organization to benefit owners and workers alike.

Fair enough. We shouldn’t romanticize the poor as entrepreneurs. Bedrock economic principles—such as economies of scale—still apply in the developing world, and access to credit alone does not impart the specialized skills and financial wherewithal that a successful microentrepreneur would need to grow her business. Plus, as Karnani notes, even in wealthy, well-educated countries, some 90% of the labor force are employees, not entrepreneurs.

Still, Karnani goes a bit too far when he claims that, to truly help the poorest of the poor, societies “should stop investing in microfinance and start supporting large, labor-intensive industries.” To Karnani’s credit, he warns us that microfinance is not a pill for curing poverty. But he makes the mistake of trying to pick a different panacea. Haven’t development practitioners and economists been doing this for long enough? (For a potent critique of attempts to cure poverty over the years, see William Easterly’s The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.)

True, the vast majority of poor people are not cut out to be visionary entrepreneurs; neither are most Americans. Stable jobs provide economic security for most of us, rich and poor alike. But we don’t need an army of successful microentrepreneurs to make microfinance worthwhile: a handful of self-selecting visionaries can create a handful of companies that generate wealth for thousands of employees. Chances are that such visionaries exist in overlooked, poverty-stricken places: local entrepreneurs have the comparative advantage of local knowledge that is hard for established players to come by in new markets.

In turn, for those living in poor countries who, like most of us, simply want a steady job, the problem is not that they are being barraged with microloans instead. In many countries, the poor are denied steady employment by oppressive, anti-business government policy: penalties for employing too many people or collecting too much revenue; tax and quota policies that remove the competitive advantage of economies of scale and lock big business out of their natural markets. Policy reforms that would enable developing countries to attract large-scale, labor-intensive industry need hardly compete with microfinance. Indeed, in the long run, such policies could also improve the climate for the very same entrepreneurs who originally got their start through microfinance.

Rather than continue on the seesaw of one faddish cure after another, policymakers, economists, and development practitioners should work to maximize access to a wide range of financial and economic options: steady factory jobs for those who want them, credit for those who opt to start their own business, not to mention developing-economy versions of the many other financial tools enjoyed in the developed world, such as insurance. The empowering virtue of the market is that when people have access to the tools they need to gain entry, they can find their own way.

Josh Weissburg is a Project Associate at the Aspen Institute.

Source: http://www.american.com/

Image credit: Photo by Flickr user medapt.org


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