Microfinance; Building Democracy or a Palliative injected by Plutocrats?

By, Peter van Dijk,
Microfinance Focus, September 18, 2011: Over the last 2 years many studies and discussions have damaged the heroic success stories of Micro-Finance reducing poverty or as Professor Yunus said “put poverty in a museum”. Micro-Finance nevertheless survived, especially in its Micro-CREDIT definition of giving loans to poor people for the most diverse of purposes (to poor women, youth, unemployed, small farmers, handicapped people, elderly people and so on and so forth). From the perspective of society, the question I would like to ask you is whether Micro-Finance aims at supporting building genuine democracies that provide possibilities to all citizens to determine their lives and have a quality life? Or is it better to consider Microfinance as alms for poor people who will always remain poor, thus an act of pity as the original Greek word means, or out of redemption, to clear the conscience of the wealthy?

In his dynamic statistics Hans Rossling shows that life expectancy of people all over the world increased tremendously over the last hundred years[1]. Even countries with weak or failing governments demonstrate without exception that people live longer now. The actors who are responsible in a country for such performance are indeed “government”. Even when production of goods and services, including health services, is happening with strong involvement of foreign organisations, local governments are responsible for allowing it to happen, including the collection, analysis and publication of performance data. Rossling’s stats thus don’t explain the reasons for the spectacular improvements or the sources of funding for the achievements. So we don’t really know why people live longer, even in countries where citizens have not earned more money and in countries where governments don’t spend much money on improving conditions of life and healthcare for all its citizens. To show the impact Micro-Finance has on people’s wellbeing and the drivers of such impact is even more difficult.

In this article I would not like to demonstrate the impact of MF with data or with an academic explanation. I thought it useful to look at the question from the perspective of what a democracy is and what its citizens may expect from their government.

Everybody knows and admits that peace, stability and good governance determine people’s wellbeing and welfare. A country’s government is mainly and ultimately responsible for the above. In an ideal world each citizen could hold government responsible for effective access to the rights, products and services that ensure their wellbeing and welfare. Governments confirmed such understanding in the Universal Declaration of Human Rights in 1948, with the Covenant on Economic, Social and Cultural Rights of 1966[2] and with the Warsaw Declaration of 2000 “Towards a Community of Democracies”[3]. Even people who support the so-called “Free Market” concede that a market is only such when there exist rules on the market definition, on the goods & services that “change hands” and on the geography where and how the exchange happens. These market rules ensure freedom of access, obligations for and conditions of entry and exit and they ensure “fair competition” between market players to guarantee sustained existence and efficient operation of the market. And who determines, monitors, ensures application and sanctions violation of the rules? Government authorities of course.

So how come that leading experts and organizations in Micro-Finance promote “Voluntary Codes of Conduct” and deviate from easy data on financial performance to “Social Performance Measurement” (SPM) which provides data MFIs are not responsible for and through exercises that are undertaken mainly by foreign experts in expensive missions funded by foreign donors? Why don’t they mention individual rights on access to financial services from providers who are accountable for their performance and why don’t they mention that governments should put in place effective rules so that consumers, especially the weakest, are ensured good quality services from providers that are legally (and financially) responsible for such quality?

On Social Justice and the Rights of free, self-determined development of humans in a society determined by government rules, one can ask her-/himself whether times are getting better. Most of us can agree that firm data still don’t demonstrate that Micro-Finance has helped people to become less poor permanently and less dependent on other people’s money. Over the last decennia large majorities of people in countries where MF has made its entrance most people still have no access to financial services from providers who are obliged to report on the quality of the services in a standardized manner to one supervising authority. Many people still have no access to the regulated financial market and most of these people are poor and remain poor, a contrario evidence that an inclusive financial sector supports securing money assets and supports sustained economic growth and job creation. At least many public agents, NGOs and donors stopped promoting the merits of the in the recent past often called “vibrant informal sector”; the arena where the name of the game is survival and subsistence by all means and no rules.

Coming back to what I said on democracies, even some “developing nations” such as Malaysia, now set as their aim that all people, especially the lower end of the pyramid in Prahalad’s terms[4], have to reach a certain minimum level of quality life for every individual[5]. But last week I saw a documentary on television that disturbed me. It was about the megacity of Manila, the capital of the Philippines. The city has about eight million inhabitants of whom half live in slums. Slums are shelters, houses, areas where people live in the worse imaginable circumstances. Slums are often built illegally on land that does not belong to the occupants. Such areas often have no legal, permanent use of basic public services such as hygienic (quality controlled) water, waste management (including cleaning), quality housing, electricity, roads, transport, police etcetera. And obviously such slums have no minimal quality provision for people to come together and relax, in public green areas, sports’ facilities, cultural events. That means that half of Manila’s people live cramped, pressed on each other in unhealthy, unsafe, unprotected areas and for which “residence” they nearly always have to spend most of their income. And there was this one priest working in the slum areas claiming that societies will need to accept living with slums as the entire society depends on the cheap work of slum dwellers.

Do you, Micro-Finance practitioners, everyone who is in some sort of way involved in this sector, agree with the pastor? In principle people may need self-determined, ensured, regulated access to a basic set of minimum quantity of quality controlled goods & services but in practice most don’t and will never have. Do you think that those people should learn to accept that? That they cannot eat and drink when and what they want, that maximum half the people can wash themselves really clean and can have modern health services when they want. Is that what you also think, accept? Many people seem to be convinced that they live in a democracy when people can elect their president (and maybe province leader) and that in their society all citizens basically have the opportunity to get rich if they work hard. Is that enough for a society to call itself a democracy?

The argument that I am trying to make, that I am in fact starting to develop, is that most development experts, including micro-finance specialists, have not looked at precise poverty data, how their accuracy is ensured and what they in practice mean for poor people in the local context. This lack of precise knowledge exists for some time now, for 65 years after the United Nations Conference on Monetary and Financial Issues in Bretton Woods (first three weeks of July 1944) that led to the creation of the International Bank for Reconstruction and Development (IBRD), the World Bank. Only now people seem to become aware that most probably over half of the world’s population has insufficient money to manage their own lives according to basic minimum standards of safety, health and well-being. And only now some people see a huge shadow looming: the huge shadow of people that cannot live according to basic standards of physical and mental health, a shadow that looms towards the people that do live safely and happily the way they want to determine their lives and protect that self-determination. As with racism on the basis of colour, race and religion, people somehow know that humans are basically all the same, and that all have the rights to determine their lives in safety. And that if such life is made impossible to them, they can be understood, yes indeed sympathized with if they revolt and demand their rights on basic quality life.

To measure poverty many governments and individual experts join the United Nations in working with the standards of 1.25 or 2 US Dollars per day, thus maximum 60 US$ per month or 720$ annually. World Bank defines the world’s poorest countries with the standard of some 1.000 US$ per capita per year, qualifying 35 countries. WB puts 56 countries (including India, Egypt, Pakistan and Vietnam) in the 1.000 – 4.000 US$ Lower Middle Income bracket and 54 countries (including Brazil, China, Indonesia and South Africa) in the Upper Middle Income bracket of 4 to about 12.000 US$ annually per head. But the “Nationmaster” website defines that most of the world’s countries fall well below a per capita income of 1.000 US$[6]. The modifying factor is the so-called PPP or Purchase Power Parity, by which the purchasing power of different currencies is equalized for a given basket of goods. But does that “basket” include the following factors: reliable access to hygienic water for drinking, washing and to prepare food, are the kitchens and restaurants regularly controlled by experts to comply with minimum health regulations of government, do these kitchens/restos manage their waste in an appropriate way (including toilets for customers), is staff well trained and do they enjoy minimum labour conditions etcetera, etcetera?

Looking at the road-way charts and benches where meals are served to so many people here in Indonesia and knowing from own experience that situations are worse in nearly all African and Asian countries I worked and lived in, I wonder whether all and more of the above costs are included in the PPP-“goods basket”. All these services would cost producers money and thus would need to be included in the prices for consumers. My guess is that if goods & services would need to be ensured according to minimum quality standards which quality would be assured by government, then many goods & services that the poor(-est) now enjoy would be much more expensive.

If we compare the above with one of the wealthiest nations of the world, the USA, life is expensive there. Its government determines that one needs to earn over 11.000 US$ a year to not be poor and over 22.000 US$ to be able to keep a family of 4 out of poverty. Over 15% of its population then qualifies as poor. But we need to provide concrete details on what that poverty means in order to make a comparison. In the USA things that poor people don’t have is basic health insurance (some 17%), quality (primary and high school at least) education, a retail shop, affordable public transport and diverse healthy food; in fact it seems that 15% of citizens of the USA receive Food Aid Stamps. That is yet again a great distance away from the standards of near inclusive societies such as in Western continental Europe where a series of services they think need to be ensured for all people at a high quality level, such as effective access to good healthcare, housing, education, transport, culture and of course basic financial services to easily pay for it all.

Related to the above argument that “PPP goods & services” would cost more when they would be calculated on the basis of a controlled minimum quality level that all citizens deserve, I would like to add that also in calculating the GINI-Coefficient that measures the wealth divide, the “possessions” of most people in developing countries cannot be estimated. The wealthy are not strictly supervised when they put their wealth in foreign accounts, under different names or when they avoid taxes. Most poor people there live and work in the informal sector where their existence is often hard to formally prove, leave alone their assets. As far as I know from experience many poor people don’t have identity cards, birth certificates; they cannot own land or it is too expensive to obtain ownership certificates; in general they don’t have any papers that prove that in fact they own anything that others would value. As the GINI Coefficient often uses the signals of what the wealthiest and poorest 10-20% of the population owns I suspect that many societies are much more divided than its data actually express.

And the shadow is visible in Micro-Finance. We understand that all people need to safeguard their money and be able to plan expenditure, which makes financial services an important instrument, as important as all life’s basic goods and services it buys. But isn’t it astounding that Wikipedia defines financial services in the context of poverty as micro-loans[7]? Is it not surprising that the United Nations is still a strong believer of the MicroCreditSummit, holding on to the conviction that charitable donations for loans to poor people will substantially help to halve poverty from 2000 to 2015?

Surely many of the wealthy people who defend the minimalist Plutocratic state of protecting wealth against other citizens start to get a little bit uncomfortable knowing that the masses who are deprived from living a safe, healthy life see what a full life looks like on TV and in the shopping malls. These “other citizens”, whom wealthy people don’t pay sufficient salaries and who understand that wealthy people don’t want to pay taxes allowing government to build an inclusive society. They see that people do stand up to risk their lives to obtain that freedom, even in dictatorial states that protect the wealthy with lots of guns and technology. No, I don’t buy for a second that the world’s poor will accept to live in conditions that we all agree are inhumane. In order to support a peaceful, stable process of integrating all citizens into modern society, they all need to be also able to safely and prudently manage the money they have. Micro-Finance has yet to fulfil its huge potential.


Palliative:Relief without Cure, from the Latin word for “cloak” or conceal. Palliative treatment is important in providing relief to patients suffering from incurable illness or from chronic or excessive pain.

Plutocrats :From Greek “Ploutos” and “Kratos”, the (Oligarchic) Power of the Wealthy. USA’s President Nixon’s political strategist Kevin Philips argued that the USA was a plutocracy in which there was “a fusion of money and government”.

[1] www.gapminder.org, see wealth & health
[2] Ratified by nearly all states in the world with the USA and China as the most important abstaining signatories.
[3] An initiative of the Foreign Affairs Minister of Poland with the strong support of USA’s Secretary of State Madeleine Albright whose country later abstained, again, from signing.
[4] The fortune at the bottom of the pyramid: Eradicating poverty through profits, by C.K. Prahalad (2004). Unfortunately the company he created, PRAJA Inc. to demonstrate his management thinking, had to lay off 1/3rd of its staff before it was sold in 2002, three years after its creation.
[5] Source: Website of the Prime Minister of Malaysia at www.pmo.gov.my.
[6] www.nationmaster.com/graph/eco_gro_nat_inc_percap-gross-national-income-...
[7] http://en.wikipedia.org/wiki/Low_income

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No suspicion please, focus on role Micro-Finance

Dear Garrett,

Thank you very much for your comments; I appreciate it very much.

But you don't have to be suspicious, the focus of my article is still on Micro-Finance but from a specific angle and there was an economic dimension regarding the calculation of poverty with regard of the PPP Purchase Power Parity. I think that more people need to be regarded as poor if prices of the "basket of goods & prices" is valued at a minimum legally ensured quality.

Nowadays goods & services can only be purchased with money and supported with financial services is it not (for receiving and safeguarding income or any other receipts, transfers, payments, and for determining and planning expenditure, borrowing or investments)?

My question is then whether Micro-Finance is a tool to build an inclusive society and thus also economy or whether it is a tool for the wealthy to keep poor people quiet and hopeful? Do you think that we need to accept that at least half of humanity will always remain poor and will thus remain permanent targets for charity and social micro-credit programs, the latter from providers, at prices, conditions and quality that are not protected by law. What do you think?

Thank you for the reference to Maslow's Hierarchy which demonstrates that already in the 19th century a model was invented listing and prioritising all goods & services that all people need.

Cheers, Peter

What I am on about, please no suspicion

Dear Garrett,

Thank you for your comment; I really appreciate it.

The main message I wanted to convey is whether practitioners and supporters of Micro-Finance think that MF should help to integrate people in a society in which all people are equal in legal terms and where all people have access to good financial services which quality is ensured by government regulation; a government that recognises that its obligations include ensuring such access. Money and financial services are absolutely necessary to manage an economy and society in which all goods and services that people need for their safety, well-being and happiness can freely circulate in a sustainable market, isn't it?

The second message is that economic theory might need to recognise that at the moment poverty measurement seems to not include all the costs for a basket of basic goods and services, including especially those of government ensuring the quality of basic needs of (all) people. This omission is currently painting a picture of global society that many people are not absolutely poor anymore and that there is a massive move out of poverty. In my view, economists need to carefully investigate and maybe reset PPP and Gini-Coefficient and continuously improve their measurement. That will then also support the overall movement of integrating all citizens in a formal sector where human rights are ensured.

In the article I provided some examples to show that in the UN's fora all has already been said and signed long ago; what I am talking about is practice, legal assurance and its logical consequences for Micro-Finance.
So what do you think Garrett: Is Micro-Finance a tool for building Democracy or a Palliative injected by Plutocrats?

And thank you for referring to Maslow's Hierarchy illustrating that what I am saying is just pure common sense and even has a reputable model.

Cheers, Peter

Supersmart Article..!

Brilliant flow from the fact...

access to public goods/services

Excellent Peter, well done. Sounds suspiciously like access to public services is what you are on about, access to (Land, energy, water, finiet resoruces and so must be distributed to ensure sufficient amount for all) health, education, labour (I will add that to your list if you dont mind), financial services, communications and transport (can be infinitely improved, cheaper and better).
I would contend that this path, from health etc. up is similar to Maslows hierarchy.
If we consider public service provision is akin to public good provision then we can start to use the UN's own thinking 'Providing Global Public Goods, Managin Globalisation'.

access to public goods/services

Excellent Peter, well done. Sounds suspiciously like access to public services is what you are on about, access to (Land, energy, water, finiet resoruces and so must be distributed to ensure sufficient amount for all) health, education, labour (I will add that to your list if you dont mind), financial services, communications and transport (can be infinitely improved, cheaper and better).
I would contend that this path, from health etc. up is similar to Maslows hierarchy.
If we consider public service provision is akin to public good provision then we can start to use the UN's own thinking 'Providing Global Public Goods, Managin Globalisation'.

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