Thomas Dichter has published an essay that is critical of "microfinance" — the practice of making small loans to poor people in developing countries, the funds from which are intended to bootstrap entrepreneurial ventures, thus providing lasting means to move to self-reliance.
Dichter's critique is twofold: microfinance has been touted too widely and broadly, which has polluted the pool of microfinance as the technique is applied to individuals who can't benefit from it; and that the lack of microfinance isn't the root of the problem of poor people in failed states — their problem is that their countries are ineptly led, and microfinance can't fix this.
I think it's useful to keep microfinance — an idea I find personally exciting, based on the small-time entrepreneurs I've known in the developing world — in perspective, but I find myself frustrated by this critique.
Every useful movement draws hangers-on who want to hitch their wagons to it — that's why every dotcom had a P2P strategy when P2P investment was hot. This isn't an indictment of the idea — just the reverse: carpetbaggers are most likely to affix themselves to useful things, not useless ones. Useful things draw money and attention, money and attention draw hustlers.
And it is certainly true that the problems of the developing world are deeper than the lack of microcredit: bad leaders and manipulation from the developed world are at the root of the problems of the developing world. But Dichter's critique doesn't advance a program for turning these problems around, just notes that microcredit is, of itself, insufficient to solve them. It's true, but to the extent that microcredit turns subsistence living into more comfortable living, it frees up resources for civic participation and political movements.
Richter does note that many microcredit funds target only very poor people who are indeed needy, but who haven't demonstrated any particular entrepreneurial acumen, and so many of those loans don't turn into successful, sustained self-reliance (of course, most businesses started in the developed world fail in the first three years, too). Paradoxically, those who have started small businesses are often ineligible for microcredit, because they've already come up with the money to start a business.
This is indeed a problem, and one that can and should be addressed. But I think that this substantial criticism of the systemic flaw in microcredit eligibility is really separate from the presence of bandwagon-jumpers and the inability of microcredit to topple dictatorships.
Microcredit evangelism is a familiar story for our industry: An idea that, after all, can produce some modest changes in the life of poor people (cash flow smoothing, confidence building, etc.) but that really works well only in some circumstances, is carried off by hype and urgency, offered as much more than it really is, and applied everywhere. As it grows it is inevitably caught up in the decades-old incentive structure of the development aid industry – people and institutions are rewarded for mobilizing and moving money, and for acting on the mistaken notion that the way to solve poverty is to go directly to the poor themselves. Since the 1970s, time and again our industry trades- in complex and contextual approaches to development (institutional, legal, governance, and other reforms) for bandaid solutions that produce at best marginal changes, but satisfy the need to be perceived as "doing something for the poor." Again, the question needs to be asked: Is the goal to ease the pain or to cure the disease?
(via Futurismic)
