Guest post by Phil Mader, a researcher at the Max Planck Institute for the Study of Societies in Cologne, Germany, and an editor of the Governance Across Borders blog, http://www.governancexborders.com
Well-established in low-income countries, microfinance is recently on the ascent as a crisis management tool in Europe. The parallels to Structural Adjustment in Latin America in the 1980s and 90s, where it played a key role in helping the bitter pill of austerity go down, are striking. But the experience of the global South over the past three decades warns against expectations of microfinance in the EU bringing anything but a glut of tiny, low-productivity, poverty-push enterprises which are likely to become entangled in debt traps.
2006 was the year small loans in developing countries were knighted as “the vaccine for the pandemic of poverty”, with the Nobel Peace Prize for Grameen Bank and its founder Muhammad Yunus bringing international fame to the idea that financial markets could effectively combat poverty. But loans for peace? Staunch supporters like Bernd Balkenhol (formerly ILO) argue the Nobel prize actually honoured the effectiveness of small loans at upholding social peace – an idea which is gaining new traction in erstwhile-affluent countries whose social peace is threatened by crisis and austerity.
As the “pandemic” of poverty spreads to Southern Europe, policymakers are seeking to apply the lessons learned in Asia, Latin America, and Africa, where microfinance has been established as a permanent pillar of social policy in many countries. As with prior aspects of neoliberalism, policies are often first tested in the Global South before their successive deployment in more advanced capitalist economies.
Microfinance is one of the instruments for “addressing inertia and social fragility, which is essential in safeguarding the quality of democracies” in order to prevent “material distress from encouraging populist deviation and citizen regression,”
the Italian Ministry of Foreign affairs recently quoted its minister, Giulio Terzi di Sant’Agata. The ministry noted Italy acting as a forerunner in Europe, having adopted a law on microfinance. The EU runs a number of microfinance programmes, expanded since 2010, aiming at getting the unemployed – particularly youths and ethnic minorities – into work through self-employment. A 2012 report argued that EU public funding should catalyse “the entry of private capital in order to create a self-sustainable market in the long run” – building new markets in times of crisis whilst keeping the poor busy and mollified via private credit; a most practical combination.
“People with ideas and projects they cannot realise as a result of not having access to credit need concrete answers; those who have lost their jobs and are having a hard time finding another; immigrants who risk social exclusion”, Terzi explained, underscoring how microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”. Moreover, it “can also help contain public spending by contributing to the reduction of social buffers, the cost of which rises in times of recession”.
Terzi, of Monti’s interim crisis management committee/government, could hardly have made the case for microfinance as a device for austerity facilitation more clearly. Tiny loans may not work at creating economic growth or significantly alleviate poverty, as the experiences of microfinance-saturated countries like Bangladesh or Bolivia show and numerous scientific studies have underscored; but they have certainly proven their worth at tempering redistributional demands while facilitating structural adjustment. They work to “contain public spending” while preventing “material distress from encouraging populist deviation” (Terzi), tiny loans are a handy “political safety net” to uphold consumption and provide alternative (self-)employment, as political economist Heloise Weber observed more than a decade ago.
Working – up to a point, that is. India, with its focus state Andhra Pradesh (AP), in 2010 joined the ranks of Nicaragua and Bosnia as countries whose microfinance sectors recently melted down. Popular unrest and agitation forced the government of AP to curb all microfinance operations following a wave of suicides among borrowers. AP used to be India’s most microfinance-friendly state, earning the nickname “Mecca of Microfinance”, to whose highly profitable lenders international investors flocked like pilgrims.
While the microloan industry – which is now in protracted decline in India – has accused the government of foul play, the crisis’ causes ultimately lay not in a political attack, but rather in the original political support for microfinance as a tool in facilitating AP’s ambitious neoliberal restructuring. The loans placated the affected populations for some time, while opening up new outlets for capital markets, this recent paper finds, which led to the widespread overindebtedness which ultimately caused the suicides.
Politically enticing as a tool for austerity politics as the tiny loans may be, the experience of the Global South with microfinance doesn’t bode well for European countries attempting to bolster low incomes and drive economic growth. Perhaps this is why Terzi only claims that microfinance “expands business opportunities as it encouraged citizens’ participation in economic life”, rather than bringing real material benefits for borrowers. For the time it takes to embed reform agendas and austerity politics, at least, the expectation is that microfinance may serve as a regime-consistent tool of seemingly doing something for impoverished and precarious segments – keeping them busy and competitive as entrepreneurs – while preventing them from getting all too uppity.