Post-apartheid South Africa provides ample evidence of the
debilitating trajectory of the microcredit movement. Evidence shows that
microcredit didn’t create large numbers of sustainable jobs. Nor did it raise
incomes in the poorest communities. Instead, the deployment of microcredit
precipitated a major disaster. South Africa saw a dramatic fall in average
incomes in the informal economy - around 11% per year in real terms - from
1997-2003. This was brought about by two things: A modest rise in the number of
micro enterprises in townships and rural areas driven by greater availability
of micro credit, along with little additional demand due to the austerity
policies of the government.
What then happened was that the self-employment jobs created
by the expansion of the informal sector were offset by the fall in average
informal sector incomes. Increased competition softened prices and reduced
turnover in each microenterprise as existing demand was simply shared out more
widely. Poverty inevitably spiked. The microcredit movement thus helped plunge
large numbers of black South African’s into deeper over-indebtedness, poverty
and insecurity. At the same time, not coincidentally, a tiny white elite became
extremely rich by supplying large amounts of microcredit to black South
Africans. Not surprisingly, many in South Africa say that microcredit brought
about the country’s own sub-prime-style financial crisis. It had its own local
flavour, generating even more disturbing race-based exploitation overtones than
even in the US.
In Latin America for over two decades an increasing number
of microcredit institutions and some commercial banks have massively expanded
the supply of microcredit. Surelythere should be evidence of a “bottom-up” microenterprise-driven
miracle? Well, there isn’t. Instead there is growing evidence that micro credit
has helped destroy Latin America’s economic base. This happened because scarce
financial resources - savings and remittances - were channelled into
unproductive informal micro-enterprises and self-employment ventures, as well
as consumer loans. Communities were thus “dumbed down” not “scaled-up” to
become more productive and growth-oriented. In a negative assessment reached by
the mainstream Inter-American Development Bank it reported that the
proliferation of microenterprises and self-employment ventures was the
principle cause of deeper poverty, inequality and economic weakness between
1980 and 2000. Its conclusion was quite damning: "The overwhelming
presence of small companies and self-employed workers in Latin America is a
sign of failure, not of success."
Africa is most often given as the obvious example of a
region held back by a shortage of entrepreneurs. The international development
community, aided by high-profile African economists like Dambisa Moyo,
continually stress this point. They argue that microcredit is desperately
needed to create an African entrepreneurial class. This, it is argued, will
serve as the vanguard of job creation and sustainable development. But development
economist Ha-Joon Chang points out that this argument is entirely bogus. He
argues that Africa already has more individual entrepreneurs than perhaps any
other continent. Many more are being created thanks to rafts of new microcredit
programs initiated by commercial banks. Yet it is because of this trajectory
that Africa largely remains trapped in poverty and under development.
There are three main reasons why the expansion of
microcredit has helped preclude the emergence of a growth-oriented local
economic structure in Africa.
First, the arrival of microcredit induced the over supply of
tiny “buy cheap, sell dear” trading operations. This, predictably, led to: very
high levels of displacement - jobs killed in other competing microenterprises,
and exit - many more failed microenterprises.
Second, the financial sector in Africa has switched into
supporting the much more profitable microcredit sector. Informal
microenterprises and consumption spending get support. Formal small and medium
businesses don’t. They are much riskier and can only pay low interest rates.
But they are much more important in reducing poverty and underpinning longer
term development. So we find a perverse situation. The more productive formal
small and medium business sector is starved of financial support. Meanwhile the
hugely unproductive informal microenterprise sector is being stuffed full of
microcredit.
Third, the market share grabbed by rafts of largely “here
today and gone tomorrow” informal microenterprises has militated against
patient capital accumulation and organic growth by better placed formal
enterprises.
The core problem everywhere in developing countries is quite
simple: the microcredit model actually works as a fundamental block on
sustainable development and growth at the local level. The microcredit model
actually sends developing countries off in completely the wrong direction. It
does this by absorbing the financial resources, time, effort and policy
attention which should have gone into supporting the most productive
enterprises. The microcredit sector today is like a rapidly growing weed that
absorbs the sunlight and nutrients required by the more valuable but slower growing
crops around it. The microcredit model is not one of the solutions to endemic
poverty, inequality, low productivity and under development. Rather, it is one
of the principle causes.
