Presentation by Milford Bateman at the Centre for Microfinance, University of Pretoria, June 11th 2010
In his new book, ‘Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism’, which was released on June 10th2010 by Zed Books of London, Dr Milford Bateman, a freelance consultant in local economic development and Visiting Professor of Economics at the University of Juraj Dobrila Pula, Croatia, outlines why he thinks that microfinance has been a wholly deleterious policy and program intervention. Coincidentally working in MpumalangaProvince on cooperative development policy for the German aid agency GTZ, we took the opportunity to invite Dr Bateman to the Centre for Microfinance to expand upon these controversial ideas to an invited audience of microfinance specialists and small business advisors.
Dr Bateman began his presentation by providing a little of the familiar background to the rise of microfinance, starting from its roots in Bangladesh. He argued that the international donor community found enormous value in microfinance on account of its self-help and individual entrepreneurship attributes. Bateman maintains that these attributes were ideologically just what the donor community wanted to promote as the solution to poverty, thereby, he argued, discouraging the call for more collectivist and community-driven solutions to poverty that might genuinely empower the poor and disempower business and political elites. Moving into the 1990s, however, and, Bateman claims, the priority changed to also making the poor pay the full cost of any support provided to them, this being in line with the ‘full cost recovery’ mantra then in vogue at the World Bank and USAID.
Dr Bateman then confronted many of the key assumptions underpinning the popularity of the microfinance model in the international development agencies, as well as in the wider public arena. He argued that the central claims enunciated by the microfinance industry for many years now are almost all myths. This list of myths includes, he maintains, the idea that there is a general shortage of microfinance, that most microfinance supports business, that property titling is decisive in unlocking additional microfinance and that microfinance ‘empowers’. Bateman went on to argue that these central claims made by the microfinance industry are all largely myths created in order to unjustifiably popularise and perpetuate the microfinance model in the face of almost no evidence to show that it might, or indeed did,actually work as Muhammad Yunus and his supporters said it would.
The main part of Dr Bateman’s presentation involved an outline of why he believes that microfinance is actually a ‘poverty trap’. At the outset, Bateman believes two fundamental flaws exist in the microfinance model as it has been unrolled across developing and transition countries this past thirty years. The first flaw, according to Bateman, flows from the established fact that everywhere most microenterprise fail very soon into their life. One major reason for this high failure rate, he argued, is to do with economies of scale. Bateman argued that most microenterprises quickly fail because of their inability to reach minimum efficient scale. And high failure rates are very bad for the poor, he went on to argue, because they inevitably involve them losing important a bundle of financial, physical and reputational assets, and this ultimately accounts for why the poor very often fall into even deeper poverty than before they started their engagement with microfinance.
The second fundamental flaw built into the microfinance model, according to Bateman, is associated with the ‘fallacy of composition’. Here, he referred to Bangladesh and the original idea of Muhammad Yunus to start as many microenterprises in every village as possible. Yunus was wrong here, maintains Bateman, because it is simply impossible to elastically expand a local community to productively absorb the simple outputs of a continual flow of microenterprises. Instead, Bateman points out, the local market most often reacts negatively in terms of falling local prices and lower turnover in both clients and non-clients. This means most new microfinance-supported microenterprises simply displace existing capacities in non-clients, resulting in no net employment or income gain at the community level.
Bateman then moved on to compare microfinance to the Morgenthau Plan designed for post-war Germany, this being the aborted plan to propel Germany into deep poverty by allowing it to support only small businesses with little growth potential. He called microfinance a ‘quasi-Morgenthau Plan’ for developing countries, a plan resulting in a dynamic inevitably leading towards the deindustrialisation and infantilisation of the local economic base. This dynamic, Bateman claims, is inherent to the microfinance model. It is most dramatically visible in the agricultural sector, which all over the world, he claims, has been undermined by its engagement with expensive microcredit. Highlighting the example of microfinance ‘saturated’ Andhra Pradesh state in India, Bateman pointed out that the state has seen as dramatic collapse in its agricultural sector following its extensive engagement with microfinance beginning around fifteen years ago. Bateman additionally claims that microfinance is an adverse intervention because it extends the informal sector and because it destroys social capital and solidarity.
In the next part of his presentation, Bateman also briefly pointed out that the commercialisation model that entered into microfinance in the 1990s has now effectively destroyed the microfinance model almost entirely, in terms of its contribution to poverty reduction and sustainable development. Bateman bases this claim on his belief that microfinance has effectively been captured by Wall Street-savvy individuals and groups determined to maximise the financial tribute following to themselves and not to the poor. Largely for ideological reasons, Bateman claims, the process of commercialisation was encouraged by the international development community in order to ensure that the poor paid the full cost of any financial support provided to them.
Bateman concluded his presentation by touching on several of his key themes. First, that microfinance is a major misdirection of scarce funds, such as savings and remittances. Bateman centrally claims that the evidence shows that microfinance ultimately destroys sustainable local economic and social development trajectories – a process he called the ‘institutionalisation of poverty and under-development’. Bateman then claims that the lessons from previous economic success in the rich western economies and in East Asia from the 1960s onwards have been simply ignored because are they are largely based on principles anathema to the microfinance model and its key supporters, such as subsidised lending, sectoral targeting, state ownership of financial institutions, and so on. Bateman then reiterates his central claim that commercialisation is the final nail in the coffin of microfinance - institutional survival and private greed, not sustainable local development, are now becoming the main goals of microfinance he thinks. Bateman ended his presentation with what he called ‘a final thought’ – he enquired of the audience if anyone could explain why it is that Jobra village in Bangladesh, the village where Grameen Bank was born, remains trapped in deep poverty and is now experiencing a major problem of generalised indebtedness?