World Economy

Micro credits founder wins Nobel prize

www.socialistworld.net, 04/01/2007
website of the committee for a workers' international, CWI

Can poor loans system end poverty and hunger?

Sonja Grusch, Socialist Left Party, CWI, Austria

In October 2006, the Nobel price for peace surprisingly went to a businessman, a banker. Muhammad Yunus is the founder of the Grameen-Bank, a system of micro credits, which found wide support in India, and was copied internationally. The Grameen-Bank started in 1983 after a pilot project in Bangladesh and has, according to its figures, since then given credits to 6.6 million people (97% women). Internationally, micro credits are seen as an important means of fighting poverty – and are supported by governments, as well as NGOs, and by people from very different political backgrounds. There seem to be very few critical voices. How was this achieved?

The UN proclaimed the period from 1997 to 2006 to be the “Decade for the Eradication of Poverty”. The truth is different – poverty grew. The figures of the UN on dollar incomes per head can paint a misleading picture. More significant are factors such as infant mortality, malnutrition, access to education and health, and the position of women in society. In fact, the number of famines has increased in the last two decades. In the 1980s ,there were, on average, 15 famines per year. By 2000, this figure increased to 30 famines per year. At the same time, about one quarter of the world population has no access to clean drinking water. In parts of Africa and south east Asia, 40-50% of children suffer from deficiency symptoms. In Eastern Europe and the countries of the former USSR, poverty diseases such as TB, are back, as a result of social cuts and privatisation.

There are many concepts about how to help the poor. None of it is free of a political background. We should be very suspicious when micro credits are hyped and massively supported by institutions like the UN and the World Bank.

The economic doctrines have changed fundamentally since the 1980s. Neo-liberalism is the dominant ideology today and the hype for micro credits is a symtom of this. This development went along with the changes in the political balance of forces. The ex-colonial countries were far more confident in the 1960s and 1970s: they were not in the debt trap yet, had just gotten rid of their colonial masters and had – at least formally – reached independence. The Soviet Union existed, and although it had nothing in common with genuine socialism, it was seen by many people across the world as an alternative system to capitalism. Today, the neo-colonial countries are buried under debt. They are dependent, again, on the West, and most of the time their political elites are mere puppets of different imperialist countries.

Micro credits and agricultural policy

Agricultural policy internationally is a explosive issue that even can lead to conflicts on an international scale, for instance between the US and the European Union, but also within the EU. Within the different international institutions, such as the WTO, agricultural policy is central, as well. Today’s situation can be summed up in the following points:

The imperialist countries produce an excess in agricultural products, which they would like to sell to the so-called Third World

Internationally, agricultural production is increasingly industrialised, which, especially in poorer countries, leads to erosion of living conditions for peasants. This process is reenforced by the use of hybrid seeds, which forces peasants even quicker into the debt trap

The imperialist countries export their agricultural products to the Third World, which is increasingly dependent on imports, as these countries have changed their production to an export oriented one (coffee, tea, tobacco etc).

Within the imperialist states, agricultural production is sometimes highly subsidised, while, at the same time, WTO bilateral contracts ban these subsidies in the neo-colonial countries.

The policy of institutions like the IMF, World Bank and WTO sharpen inequality because credits are linked to certain demands:

Subsidies for basic goods have to be reduced or totally stopped, which increases the prices of these goods and, therefore, reduces the living standards of the population. In 1998, the revolutionary movement in Indonesia were kicked off by such IMF dictates.

Agricultural production is reorientated towards export and the sales are used to pay back debts (or its interest). Often, there is not enough food produced to feed people in these countries, any more.

The structural adjustment pprogrammes (SAP) led to reductions in agricultural subsidies for poorer countries which makes it even more difficult for them to compete on the world market against often highly subsidised agricultural products from imperialist countries.

The increase, since 1995, in worldwide malnutrition, is a result of this policy. Micro credits have similar effects. In India, for example, credits are mainly given for the creation of small shops. Poor people are driven out of agriculture into the service sector. In some cases, they are exploited as part of new distribution chains. The effects are far reaching. Dependence increases. Of course, agriculture, in most cases, only produced small crops, but it was possible to cover basic needs without money. This possibility is closed in the service sector. The side-effects are good for multinational corporations: it is easier to buy land, the former landowners are easier to exploit and manipulate as their debt burden increases, and the dependence on imported food increases.

Micro credits and international finance

The main argument for micro credits is to open up chances for people who, until now, had no chance of getting credit because of their lack of securities. But the first question we should ask is: Why does poverty exist and why is there not enough money in these regions? Poverty in the so-called Third World is the result of centuries of colonialist and imperialist exploitation. Raw materials were systematically stolen from those countries, the population brutally suppressed and exploited, and the development of an independent, national industrial base were strangled.

International institutions, like the UN, the World Bank and the WTO, did not not change this policy but continued it, although in a more subtle way. The gap between the rich and the poor – both within nation states and between different states – has increased due to neo-liberalism since the 1980s. Most of the former colonies got loans in the 1970s from their former colonial masters. But interest rates for these loans mushroomed in the 1980s. This marked the start of the debt trap in which most of the neo-colonial countries are stuck today. In the 1980s, money transfers turned around, meaning that the Third World pays for the profits of the imperialist companies from the First World. Every year, since 1995, the sub-Sahara region, for example, pays 1.5 billion dollars more to the industrial countries in the north than it receives. In the 1990s, it was more difficult for those poorer countries to have access to loans, which led to a certain lack in capital.

However, international finance organisations have turned to poorer countries partly due to the worldwide over-accumulation of capital. Since the 1980s, capitalism finds it increasingly difficult to make profits. As international competition intensifies, the realisation of profit is more difficult to achieve. In relation to what people can afford - not what they would need - there is worldwide overproduction. It is less profitable to invest in the sphere of production. This is why more and more capitalists turn towards speculation. The boom on the financial markets is a sign of this, as well as more new “products” on the financial markets and wilder speculation. Micro credits are a new financial market; a new layer of customers were found and new areas for investment for the international capital opened up.

The UN called 2005 the year of micro credits and it set a target for as many as 100 million people to become costumers (and debtors) of micro credits.

Micro credits are distributed by NGO’s, and national and international banks. This market was conquered by big banks, like the Indian state bank, Bank of India, the World Bank’s offspring, the FTC, the Soros Economic Development Fund and the resonsAbilityGlobal Microfinanc Fund, a fund in which Swiss banks, like the Credit Suesse Group, participate. Bigger banks work through sub-companies and try to show a supposedly humane approach. This is also a way to win investors in the imperialist countries who, for several reasons, do not want to invest their money in shares for weapons production or making environmentally-damaging products. The international co-ordination takes place under the World Bank umbrella.

The Austrian Development Agency (ADA), which is responsible for foreign aid, bluntly states that, in contrast to the past, today´s micro financing is not charity, but has to make profit.

NGOs often act in between the so-called costumers and the banks – some of them, because they are convinced of the concept of micro credits, some because they see no alternatives, some because they act on behalf of governments. The role of NGOs, especially in neo-colonial countries, is a problematic one, as they are often used as instruments to implement the ruling ideas (which are the ideas of the rulers) and to control those who might rebel against injustice.

For the banks, the risk is relatively low: the repayment rate of micro credits is often as high as 90% or more. The state also subsidises them or gives guarantees (which does not address the question of how hard it is for the costumers to pay back loans). A big part of the cost is externalised: consulting and supervising, judging who gets credit and who does not, the encashment of membership-fees and repayment: all this is done by NGOs and the costumers (in the Grameen-Bank the costumers are treated as members). This is unpaid labour which often is a condition for future credit. And as most of the credits are calculated in euro or dollars, the risk of currency fluctuation has to be covered by the costumers or the NGOs.

All in all, micro credits are quite a profitable business for banks, which has the additional benefit of being promoted as a humane policy.

The enforcement of an ideology: the state is pushed back

In the last decades, Western nations increasingly cut back on foreign aid. In 1970, the UN decided that rich countries should pay 0.7% of their GDP on foreign aid. In fact, foreign aid increased after WW2, until the 1960s, and went down ever since. Today, foreign aid, on average, is as low as 0.4% of GDP. Within the neo-colonial countries, measures to fight poverty, like subsidies for basic goods, are often abolished under the pressure of the IMF and World Bank. Of course, the entire concept of abolishing poverty through aid from richer states (and not the companies that benefit from the super-exploitation of these countries) is not possible as long as the system of capitalism continues, but, even so, previous paltry aid has declined, reflecting the trend towards privatisations.

There is a big decrease in state measures, while there is massive propaganda in favour of micro credits. In the 1970s, we were told that “hunger is no destiny”, and colonialism and imperialism were held responsible by many commentators for the problems of the Third World. Many ex-colonial countries tried to grow and produce for their own use, so they would not be dependent on foreign imports (with growing international competition, this concept was stopped by the imperialist countries and the WTO). A shift also took place on the understanding of who is responsible for poverty. The micro credits movement, in particular, create the illusion that everybody can have a chance now to release themselves from poverty. This can also be interpreted as: Those who are still poor, despite the great possibilities to escape it, can no longer blame anyone else: it is their own fault.

The declaration of the 1997 Micro Credit Summit stated that micro credits would be the victory of pragmatism over ideology. It would be more correct to say, micro credits are a symptom of the replacement of one ideology by another.

Nobel prize winner, Muhammad Yunus, fits well into this ideological shift. He is against the cancellation of debts for the neo-colonial world and claims people grow with challenges not with abatement. What he does not say is that living in a country like Bangladesh is a daily challenge. It is not a question of aid or debt relief, but of an end to class exploitation.

Micro credits: Do the poor gain?

Despite this, it is argued that poor people still benefit from micro credits. It is supposedly a win-win-situation, where banks and companies, as well as the poor, benefit. But reality is different. There are no broad studies of the effects of micro credits. We are given heart-rending examples of women who bought a cow with the money from micro credits and gained self-confidence. It is another question as to why there are no such studies. Why is no balance-sheet drawn of such a big project like micro credits? But there is some research and examples that highlight the negative effects of micro credits.

Usually micro credits charge high interest rates. The Grameen-Bank charges 20% p.a. for income-creating credits. But there are also interest rates as high as 40% p.a. Although this is lower then the rates charged by local money-lenders, they are higher then the interest rates charged for bigger loans at state banks. The argument for the high interest rates is the big administrative effort that is necessary to supervise the loans and to bring them to the costumers. But we must not forget these costs are to a large extent externalised and have to be performed by the lenders. The big banks only invest if they expect profit.

The credit-users get trapped in a vicious circle, as they shift from the agricultural sector, which at least gives some more independence in the neo-colonial countries, to the service sector, and face increasing dependence.

The level of debts for individuals, as well as of SHGs (Self-Helping-Groups – the creatin of which are often a condition for the micro credit system) increases. Those people often have no experience with bigger amounts of money (and micro credits give them more money then they would usually have). And a big part of the credits are used for immediate spendings in cases of emergencies, such as a bad harvest, the death of a family member and others. These spendings, of course, cannot create any future income, but the credit creates future debts. Research on micro credits in south India shows there is pressure to use the credits to create small shops (One example given was women who wanted to invest in a mill were “convinced” to invest in a shop instead.) Most of the time these shops are not profitable – which does not come as a big surprise. Who would buy from these shops? The local population has little money. If there was a need (or the financial demand) for such shops they would have been established long ago. But the money to pay back the credit has to come from somewhere. Even worse, the banks often advise for more credit to be taken, arguing this should be used to save money in advance (which would avoid debts). Andhra Pradesh is often used as success story of micro credits, yet it is the Indian state with the highest number of deaths because of debts (including suicides)! For most people in the poorest countries, getting micro credits is not even possible. There are no micro credits for the poorest of the poor, as there must be a possibility of paying back debts. People who cannot work cannot get credit.

Helps women?

The most common argument for micro credits is that they increase the independence of women in very patriarchal societies. It it true that, in most cases, only or mainly women get micro credit money. In a lot of cases, SHGs (Self-Helping-Groups) are used. Of course, the coming together of women in these groups and the exchange of experiences has positive effects on the confidence of these women (although we should question if these structures would not have come into being without the system of micro credits). But the more the supervising and handling of credits are central in the SHG, the more other vital social issues, like violence in the family, the general situation facing women and others, are pushed aside.

Self-Helping-Groups are also used by the state or organisations that deal with the credits (like the Grameen-Bank) to carry out their agenda on questions like family planing and hygiene. Some of policies may be positive (like promoting that people only drink water that is boiled) but the way they are implemented is very paternalistic. There are also reports about negative developments within the SHGs if the projects are not economic successful, and the question of paying back debts leads to conflicts within the groups. An especially negative effect is that women get credits, but the family structure does not change. That means it is mainly women falling into the debt trap. The women get the money, but the men use the money or do not pay for things (like school fees) as they regard their spouses now “has the money anyway” to do so. Women are responsible for paying back credit. In all, this creates extra work and hardship for women.

Micro credits no solution to poverty or hunger

Micro credits are an international business involving millions or even billions of dollars. The institutions dealing with them are very different. Not every criticism will be valid for each of them. No doubt, there are positive experiences where lenders could improve the lives of poor people.

But micro credits are no solution to poverty and hunger. The basic lie of capitalism, the myth that any dishwasher can became a millionaire, cannot be fulfilled, just because it is repeated again and again. Bangladesh is often used as a positive example for the success of micro credits The population of Bangladesh, for example, suffers from arsenic in drinking water and from regular floods (which come more often as a result of global warming). Both are problems that can not be solved individually.

In the 19th century, some people hoped that co-operative movements, for production or consumption, could create “social islands” within capitalism. Hugo Chavez has a similar concept today, as he tries to build up a sort of parallel economy in Venezuela.

But, in the end, both concepts cannot work if the target is to totally abolish hunger, poverty and exploitation. The unequal distribution of wealth cannot be solved individually. Micro credits tend to drive people in the direction of individualism, and resistance against high prices of seed or unequal distribution of land are not raised.

Hunger and poverty are the result of a system of profit. Capitalism needs unemployment and poverty to create profits. A social capitalism – especially for everybody in the world – is Utopian, and in contradiction to the needs and mechanisms of capitalism.

It is necessary to struggle, now and here, against poverty and hunger. But to abolish these huge social ills, it is necessary to get rid of capitalism and to fight for a socialist society. Under a planned economy, with workers’ democratic management and control, people’s needs would be met.