At long last, a new chapter (.docx and .pdf). Each time I upload a chapter it feels like I am permanently lifting a weight off my shoulders with a mighty heave. This one took so long, I doubt it is worth the wait (or weight). It is the last of the trio of chapters that evaluate microfinance from different perspectives, this one from the perspective of what I am now calling "development as industry building." Clunky, I know. Perhaps it should be "development as transformation."In the interest if getting this durn thing done, I have decided to drop what was to be chapter 9, on the selling of microfinance. My greatest regret is the loss of the clever title: The Effects of Causes. That means I have finally arrived at the last chapter, the new chapter 9 on overall implications. It will have sections on the potential of new technologies and the role of donors and investors.Here is the conclusion. As always, I welcome comments. Thank you, loyal critics.
I started this chapter with the idea that there must be something right in a charitable project that repeatedly and uniquely produces such impressive organizations. Rather than trying to pin down the direct link from the development of such institutions to poverty reduction and empowerment (the province of the previous two chapters), the premise here has been that building these businesses at the “bottom of the pyramid” is development, appropriately defined. It turns out that this success was easy to observe as it was hard to define, for it involved articulating the murky essence of the societal transformations we call economic development. (Unlike the quarks and red giants of physics, the objects of economics are everyday-ordinary—jobs, prices, loans—yet their behaviors resist human understanding, perhaps all the more for being human creations.) The conception of development success offered here draws on Schumpeter’s focus on the entrepreneur, the one who turns ideas into economic action; and it borrows from ecological economics to think about when growth in microfinance constitutes development.Against these definitions, microfinance stacks up well. Where there were no MFIs a few decades ago, now there are thousands. The big ones are businesses or operate like them. The industry’s history is one of constant innovation, from the basic credit delivery methods to various forms of savings, from pen-and-paper bookkeeping to Palm Pilots, from foundation grants to securitized loans and IPOs. This success may not appeal to the public as much as lifting Maria in Nicaragua out of poverty or empowering Phong Mut in Cambodia to send her daughters to school. But the success is more certain. And it should be recognized as economic development in a deep sense.Accepting that microfinance has “worked” in this way, the logical next question for the potential investor is: is microfinance worthy of outside support? The answer here is far more cautionary. On the on hand, there might not be a microfinance movement were it not for outside donors. Microfinance is an aid success. Yet precisely because the idea is introduced from the outside, like the reindeer on St. Matthew Island, microfinance can easily undermine itself and hurt those it is meant to serve. For growth in microfinance to be healthy for the industry and for society, for the growth of microcredit in particular to be development, the growth impulse must be counterbalanced by restraints. These can take several forms: credit bureaus, conservative organizational culture at MFIs, regulations, and limits on outside finance that force greater dependence on deposit-taking. Happily, the last of these is also a valuable service.Perhaps the most important lesson from this analysis is about mythologizing the impacts of microfinance has distorted funding for it, and thus the industry itself. The recent financial crisis exposed some MFIs as reindeer that grew fat on easy finance. Probably others will be found in time. The money came easily because of microfinance’s overblown reputation for fighting poverty and empowering women. Meanwhile, Schumpeter reminds us that if industrialization, history’s only proven weapon against poverty, is what we are after, credit will probably do more good higher up the food chain. Small businesses in developing countries also struggle to raise capital, yet may have more propensity to create what poor people really want, jobs. Their needs are often overlooked in the enthusiasm for microfinance. In these ways, mythologized success has undermined true success.
