4 ms·

The Power of a Dollar: Microcredit exploits the poor

37 points by pmcpinto 11y ago

nickff 11y ago
There have been many valid criticisms of microcredit, but this article is not one of them, chiefly because it falls victim to a few logical fallacies and faulty assertions. This piece assumes that the poor people using microcredit are doing so to help acquire goods for trade (or another similar), and since their customer base will gain no new wealth, the goods will go unused. Much of the investments that microcredit loans are used for are things like metal roofs (which are far superior to and less maintenance intensive than thatched roofs), and simple tools which improve productivity, thus allowing them to engage in trade or other activites which help to improve their lifestyle. We should remember that just because someone is a poor farmer now does not mean they have to continue being just a farmer with low output; they could get a second job, improve their farm's output, or go out to sell their goods to another village if they had the time and resources; we should not dedicate all aid resources to keeping subsistence farmers tethered to the same farms with the same tools, but slightly improving their plight. The article also seems to assume that the bad motives (mainly greed) of some microcredit lenders will lead to bad results, and that lending money to poor people is somehow immoral (possibly due to something like the Copenhagen interpretation of ethics), and that this immorality makes the loan bad. One fact I found very notable and surprising, though not mentioned in this article, is that a great deal of microcredit is actually used as a savings commitment device (as many people have negative effective interest rates for various reasons), so it allows the borrower to make larger capital expenditures than they would otherwise have been able to, because they had issues preventing them from saving up.
- conistonwater 11y ago
  > There have been many valid criticisms of microcredit, but this article is not one of them... I agree. > It assumes that the poor people using microcredit are doing so to help acquire goods for trade... I don't think it does. I find it hard to figure out what his actual argument is (beyond cheap innuendo about ideologies), but he seems to not assume that, e.g., "Yunus believed that the poor, and especially women, could establish an informal microenterprise and then sell basic goods and services to other poor people in the community." If I understand his argument correctly (including the way he mis-invokes Say's law), he seems to be saying that lending to people to start new enterprises is not a worthwhile activity because the new small enterprises compete with existing small enterprises, in this competition some enterprises go bankrupt (because he says demand for the produced goods is fixed, what?!), thus new enterprises enabled by this lending just displace other enterprises, producing no net benefit to society. But isn't that just straight wrong? His argument doesn't even seem specific to micro-lending, it reads like an argument against lending and/or entrepreneurship in general. He also invokes "profitability" as a bad thing, which is weird since why else would anyone commit capital to this. On the other hand, non-profitability and charity, he says, is also bad — No need for solidarity movements and active resistance to exploitation and unfair conditions imposed on developing countries — just send a donation to Kiva and the poor can take care of themselves! I know there are questions about how effective microfinance is in practice (cursory search gave me http://www.nber.org/papers/w18950 http://www.nber.org/papers/w18950), but this just seems like a bad argument. Innuendo about "neoliberalism" doesn't help the article either.
  - makomk 11y ago
    You're right, many of his arguments do indeed apply to lending to new small enterprises in general, and he actually references a UK working paper making a similar argument about small business funding here. This isn't an argument against lending and entrepreneurship in general; there's strong arguments for lending to existing businesses to ensure they don't run into cashflow issues (if profitable businesses go insolvent it's costly and disruptive), and to allow them to operate more efficiently since this means they can offer the same products for less. Also, it should be obvious why the immense profitability of microlending institutions is an issue if you think about what that means. It's effectively a transfer of cash from the poorest sectors of society to wealthy investors, and with no countervailing transfer in the opposite direction - because those microbusinesses are selling to other people like them, not wealthy investors - that just makes the poor poorer.
n00b101 11y ago
"Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. But it is also common wisdom that to "teach a man/woman to fish" is better than to just "give a fish." As an entrepreneur I do believe in the unique ability of entrepreneurship to allow people to raise themselves above and out of their present circumstances. Perhaps "microequity" financing can succeed where "microdebt" financing has failed? Or maybe "micro-crowdsourcing?" How about a Kickstarter for African basket weavers? Would you pay $5+shipping for a hand made African/Asian/Etc cultural craftwork? Would you pay $50 if you saw the craftperson's story/picture/pitch video/poor family? Crowdsourcing has the benefit of solving serious supply chain and financing failure risks for entrepreneurs, it's basically pre-ordering and building product on the customer's expense. Perhaps the solution is a combination of microdebt, microequity and microcrowdsource? I don't mean to disparage anyone, but perhaps we could all benefit from some young grads with Silicon Valley startup fever focusing technology and innovation on the poorer parts of the world instead of focusing on delivery-based services in rich "lifestyle bubble" cities.
- zzalpha 11y ago
  "Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. I couldn't care less about your unsupported "common wisdom". Show me data.
  - GFK_of_xmaspast 11y ago
    Are you aware of the difference between an empirical claim and a normative claim?
- mtdewcmu 11y ago
  >> "Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. But payday-loan places have been an absolute gift to the poor here in the US...

37 points by pmcpinto 11y ago

There have been many valid criticisms of microcredit, but this article is not one of them, chiefly because it falls victim to a few logical fallacies and faulty assertions. This piece assumes that the poor people using microcredit are doing so to help acquire goods for trade (or another similar), and since their customer base will gain no new wealth, the goods will go unused. Much of the investments that microcredit loans are used for are things like metal roofs (which are far superior to and less maintenance intensive than thatched roofs), and simple tools which improve productivity, thus allowing them to engage in trade or other activites which help to improve their lifestyle. We should remember that just because someone is a poor farmer now does not mean they have to continue being just a farmer with low output; they could get a second job, improve their farm's output, or go out to sell their goods to another village if they had the time and resources; we should not dedicate all aid resources to keeping subsistence farmers tethered to the same farms with the same tools, but slightly improving their plight. The article also seems to assume that the bad motives (mainly greed) of some microcredit lenders will lead to bad results, and that lending money to poor people is somehow immoral (possibly due to something like the Copenhagen interpretation of ethics), and that this immorality makes the loan bad. One fact I found very notable and surprising, though not mentioned in this article, is that a great deal of microcredit is actually used as a savings commitment device (as many people have negative effective interest rates for various reasons), so it allows the borrower to make larger capital expenditures than they would otherwise have been able to, because they had issues preventing them from saving up.

conistonwater 11y ago
> There have been many valid criticisms of microcredit, but this article is not one of them... I agree. > It assumes that the poor people using microcredit are doing so to help acquire goods for trade... I don't think it does. I find it hard to figure out what his actual argument is (beyond cheap innuendo about ideologies), but he seems to not assume that, e.g., "Yunus believed that the poor, and especially women, could establish an informal microenterprise and then sell basic goods and services to other poor people in the community." If I understand his argument correctly (including the way he mis-invokes Say's law), he seems to be saying that lending to people to start new enterprises is not a worthwhile activity because the new small enterprises compete with existing small enterprises, in this competition some enterprises go bankrupt (because he says demand for the produced goods is fixed, what?!), thus new enterprises enabled by this lending just displace other enterprises, producing no net benefit to society. But isn't that just straight wrong? His argument doesn't even seem specific to micro-lending, it reads like an argument against lending and/or entrepreneurship in general. He also invokes "profitability" as a bad thing, which is weird since why else would anyone commit capital to this. On the other hand, non-profitability and charity, he says, is also bad — No need for solidarity movements and active resistance to exploitation and unfair conditions imposed on developing countries — just send a donation to Kiva and the poor can take care of themselves! I know there are questions about how effective microfinance is in practice (cursory search gave me http://www.nber.org/papers/w18950 http://www.nber.org/papers/w18950), but this just seems like a bad argument. Innuendo about "neoliberalism" doesn't help the article either.
- makomk 11y ago
  You're right, many of his arguments do indeed apply to lending to new small enterprises in general, and he actually references a UK working paper making a similar argument about small business funding here. This isn't an argument against lending and entrepreneurship in general; there's strong arguments for lending to existing businesses to ensure they don't run into cashflow issues (if profitable businesses go insolvent it's costly and disruptive), and to allow them to operate more efficiently since this means they can offer the same products for less. Also, it should be obvious why the immense profitability of microlending institutions is an issue if you think about what that means. It's effectively a transfer of cash from the poorest sectors of society to wealthy investors, and with no countervailing transfer in the opposite direction - because those microbusinesses are selling to other people like them, not wealthy investors - that just makes the poor poorer.

n00b101 11y ago

"Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. But it is also common wisdom that to "teach a man/woman to fish" is better than to just "give a fish." As an entrepreneur I do believe in the unique ability of entrepreneurship to allow people to raise themselves above and out of their present circumstances. Perhaps "microequity" financing can succeed where "microdebt" financing has failed? Or maybe "micro-crowdsourcing?" How about a Kickstarter for African basket weavers? Would you pay $5+shipping for a hand made African/Asian/Etc cultural craftwork? Would you pay $50 if you saw the craftperson's story/picture/pitch video/poor family? Crowdsourcing has the benefit of solving serious supply chain and financing failure risks for entrepreneurs, it's basically pre-ordering and building product on the customer's expense. Perhaps the solution is a combination of microdebt, microequity and microcrowdsource? I don't mean to disparage anyone, but perhaps we could all benefit from some young grads with Silicon Valley startup fever focusing technology and innovation on the poorer parts of the world instead of focusing on delivery-based services in rich "lifestyle bubble" cities.

zzalpha 11y ago
"Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. I couldn't care less about your unsupported "common wisdom". Show me data.
- GFK_of_xmaspast 11y ago
  Are you aware of the difference between an empirical claim and a normative claim?
mtdewcmu 11y ago
>> "Microdebt" clearly does not solve poverty. This idea has always had its critics. It is distasteful at best to be a money lender to the poorest strata of humanity. Common wisdom tells us as much. But payday-loan places have been an absolute gift to the poor here in the US...