The Grameen Thing: Just Another Bubble
The hysteria about the glories of microcredit must have been another illusion created by the economic boom, but somehow, there for a while, it was hard to talk sense into anyone on this issue. Somehow, all the world came to believe that the key to lifting people out of poverty was to grant everyone loans that they then had to service out of some income stream that they didn't have.
This strategy of loans-to-the-poor was supposed to be the magic means by which people could bypass the old-fashioned stage of saving, investing, exchanging, and producing. Even the classical liberals believed it, as shown in the breathless tributes to Professor Yunus after he received yet another prize for his Midas-touch act.
As the author of two of the only pieces online attacking microlending, I've been dealing with incredulous emails on this subject for a long time. Better material has been popping up in the last year, in other a few other places.
And yet today, even Buttonwood is beginning to see the distinction between debt and wealth. And the Boston Globe is now debunking the Grameen Myth.
Reporting on two new studies, the journalist reports:
What they find is that, by most measures, microcredit does not offer a way out of poverty. It helps a few of the more entrepreneurial poor to start up businesses, and at the margins it may boost the profits of existing microenterprises, but that doesn't translate into gains for the borrowers, as measured by indicators like income, spending, health, or education. In fact, most microcredit clients actually spend their borrowed money not on a business, but on household expenses, on paying off other debts or on a relatively big-ticket item like a TV or a daughter's wedding. And while microcredit champions point to microloans as a tool for empowering women, the studies see no impact on gender roles, and find evidence that if any one group benefits more, it's male entrepreneurs with existing businesses.
Comments (18)
Abhilash Nambiar
Grameen could never exist in a free market could it?
Published: October 12, 2009 4:10 PM
Jam
Micro credit to poor people is misallocated to unproductive pursuits? All Mr. Yunus had to do was look to micro credit in the US (which has been around for decades). We've had this so-called "micro credit" for years in the form of credit cards and payday cash advances. Almost universally it is always spent on non-essentials such as those big screen TVs and cartons of cigarettes.
Most chronically poor people are poor because of their bad spending habits. Giving them more rope to hang themselves isn't the answer. Spending habits must change before an infusion of capital is to be of any benefit.
That is why real savings, not credit, is the answer. Scraping and saving shows that someone is serious about being productive. If someone has to work hard and go without luxuries for a year to build up a nest egg of $1000 then that person will be 100% aware of the value of that money and will be unlikely to fritter it away. If you hand someone $1000 for doing nothing and with little expectation that it will be repaid then the borrower will place no real value on the money either and piddle it away on whatever knickknacks that catch their fancy.
Published: October 12, 2009 4:49 PM
JBHarshaw
I think a distinction needs to be made here -- and one which the Boston Globe (and alas, Mr. Tucker) are missing, to wit:
So what the results are REALLY proving is not that microcredit is "bad" but rather several important things that are NOT being seen:
Published: October 12, 2009 5:48 PM
Renegade Division
@Abhilash
They could, but not the way its being presented. What they are is basically a bank which hijacks a customer's life and provides them loan on high interest rates.
In India its called 'Bonded labor', and its illegal, unless you call it 'Grameen and Microcredit'.
Published: October 12, 2009 5:50 PM
newson
jeffrey tucker, bono hates you. sir bob geldof says you've written yourself out of any free live-aid concert tickets.
you called the emperor nude, first, and all kudos to you.
if the bandladeshi currency's purchasing power didn't erode so frantically, the poor could actually save in cash. of course, there are no nobel prizes in the offing if this is the model chosen, no matter how successful it was in the west a century or two ago.
Published: October 12, 2009 6:37 PM
Abhilash Nambiar
@Renegade Division
I think you missed the point totally. What is wrong with Grameen is not the concept of 'bonded labor'. Every person is bonded by obligation to pay debts owed. And eventually we all work it out directly or indirectly. The problem with Grameen is that it is not 'bonded labor', the problem is that it is not profitable, because it is not the instrument for capital accumulation that Yunis claims it to be. It is subsidized by the Government (or must I say Governments, it is used to funnel a lot of international aid). And that can never happen in a free market.
Published: October 12, 2009 6:56 PM
Ohhh Henry
"by most measures, microcredit does not offer a way out of poverty."
All is well in Governmentopia. Failure to address any of the stated goals of the program means that the door is now kicked even further open to allow even larger-scale and more corrupt government "help". Bureaucratic jobs and political nepotism will be safe from free markets well into the foreseeable future. Failure breeds greater intervention and greater intervention breeds more failure.
Except ... what will happen in places like India when places like USA, EU, Canada and Australia no longer have the cash to throw at their ridiculous dirigiste programs via IMF, World Bank, WHO, UNICEF, et al.? Perhaps India will break up into smaller pieces, like the old USSR.
Published: October 12, 2009 9:00 PM
pravin
@abhilash.
i dont know about grameen,but SVS Microfinance in south india is definitely profitable and surely not supported by the govt. the NPAs are less than 2%.
the success of lending is based on due diligence by the lender.if you are lending for consumption, it is a bad loan -especially if they are made to the poor. that is the point here.
payday loans and credit cards dont compare because there is no due diligence.heck there WAS no due diligence even with the big US banks in the recent housing crisis.
there is no reason why credit to the asset-poor cant be made if lending is done for productive uses.
i disagree with Jeff's criticisms on this ground.
the idea that credit exists only for the asset rich is ridiculous,elitist and definitely not free market.
credit should flow where there is profit.
Published: October 12, 2009 11:43 PM
pravin
Except ... what will happen in places like India when places like USA, EU, Canada and Australia no longer have the cash to throw at their ridiculous dirigiste programs via IMF, World Bank, WHO, UNICEF, et al.? Perhaps India will break up into smaller pieces, like the old USSR."
totally ignorant about the thriving enterpreneurship culture in india.the indian economy is growing INSPITE of the IMF,WHO,UNICEF and other colonial puppets of the US govt.
like i said before,capital flows where there is a profit opportunity -and there are plenty in india
Published: October 12, 2009 11:49 PM
Abhilash Nambiar
@pravin
You are talking about SKS Microfinance right? I suppose it could work absent government subsidies. Profit is how they know they are doing things right. But it is not what Muhammad Yunis hyped it up to be
You think India will eventually break up? That is Jim Rogers talk. Well, if India breaks up I hope it happens peacefully, not like Yugoslavia. India has been culturally unified for centuries, despite having diversity in languages and ethnicities. But rarely in its long history has it persisted as a unified political entity.
Published: October 13, 2009 8:33 AM
neo_austrian
@pravin
The point that credit should flow to profitable uses, regardless of assets misses one critical point that prevents this flow. If the borrower does not have a bondable asset of sufficient value, then the lender will not lend because the borrower has an incentive to consume the lent money.
Assets are required, because the borrower needs some skin in the game. Assets are accumulated through savings, savings generated from employment, employment from private investment.
Published: October 13, 2009 9:43 AM
Louis-Martin
My understanding is that honor still has value as a "collateral" in some regions. I've used it in rural Canada and I was under the impression that this was key to Mr. Yunus implementation.
And if there is no collateral, why not define a yield based on the profits of the endeavour, instead of interest rates per se?
And yes, it all boils down to due dilligence and knowing your clients.
Published: October 13, 2009 10:33 AM
neo-austrian
@Louis-Martin
I'm sure honor is still important in many dealings. It goes by another name too: reputation. Whichever word you choose, though, it requires some personal knowledge of the borrower. Such knowledge is often not scalable, but certainly this can stand in for literal cash collateral. More often, though, it adds to the whole credit-worthiness package. So, it can reduce, but may not eliminate, required collateral.
I'm a little confused as to how you want to define yield separately from interest. To me this implies an equity investment (i.e. profit sharing), not a credit relationship.
Totally agree vis-a-vis due diligence. A careless banker does no one any good.
Published: October 13, 2009 10:49 AM
Ohhh Henry
"You think India will eventually break up? That is Jim Rogers talk. Well, if India breaks up I hope it happens peacefully, not like Yugoslavia. India has been culturally unified for centuries, despite having diversity in languages and ethnicities. But rarely in its long history has it persisted as a unified political entity."
Yes it is Jim Rogers talk - what made me ask this question is having heard Jim Rogers state that he saw no reason to invest in India because he saw no sign that the governments there will let anyone keep their profits. He spent some time there and wrote a report about what he found. It's a tale of chauvinism, protectionism and meddling, petty bureaucracy (or do I repeat myself).
Published: October 13, 2009 11:03 AM
Nick Bradley
Jeff -- I tend to disagree... at least in the current environment.
First, a couple of statements
1. In an inflationary environment, wealth is transferred from savers to debtors -- I don't think anybody disagrees with that.
2. In such an environment, the ability to access credit is critical to increasing wealth.
This is apparent in all economies with fractional reserve banking and loose monetary policies.
I think its dangerous to assume "market conditions" when analyzing a problem -- statist intervention changes the rule sets.
Published: October 13, 2009 11:51 AM
pravin
creditworthiness is essentially due diligence based on
capacity (to repay), collateral ,covenants and character .
i agree that it is difficult to scale up when collateral is not high (amongst the poor). that is why there is relliance peer pressure and community-policing amongst the borrowers in these SHG(self help grps)
@neo austrian. this is precisely why microfinance doesnt work everywhere. it works where there traditional joint families and strong village/caste/tribal bonds exist. i cant see it happening in urban america .it is definitely possible in rural india or bangladesh.
Published: October 13, 2009 2:51 PM
Vanmind
When it comes to helping developing-world people lift themselves out of poverty, I would suggest that Yunus drools and Hernando de Soto rules.
Published: October 13, 2009 5:39 PM
neo-austrian
@ pravin
Spot on, with your comment about urban v. rural. I can know your reputation much more easily if your family and mine have been friends for generations.
Published: October 13, 2009 8:03 PM