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Downsides of Microfinancing
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Microloans are more beneficial to borrowers living above the poverty line than to borrowers living below the poverty line. This is because clients with more income are willing to take the risks, such as investing in new technologies, that will most likely increase income flows. Poor borrowers, on the other hand, tend to take out conservative loans that protect their subsistence, and rarely invest in new technology, fixed capital, or the hiring of labor.
- microcredit could actually do more harm than good to the poorest. One reason being the high interest rates charged by microcredit organizations.
- Another problem with microcredit is the businesses it is intended to fund. A microcredit client is an entrepreneur in the literal sense: She
raises the capital, manages the business, and takes home the earnings.
But the “entrepreneurs” who have become heroes in the developed world
are usually visionaries who convert new ideas into successful business
models. Although some microcredit clients have created visionary
businesses, the vast majority are caught in subsistence activities.
They usually have no specialized skills, and so must compete with all
the other self-employed poor people in entry-level trades. Most have
no paid staff, own few assets, and operate at too small a scale to
achieve efficiencies, and so make very meager earnings. In other words,
most microenterprises are small and many fail – contrary to the United
Nations’ hype that microentrepreneurs will grow thriving businesses
that lead to flourishing economies.
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Tags: LEARN5, microfinance
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Comment by Ezra Ho on April 7, 2010 at 9:01am -
I feel this falls into the classic trap of looking at a single tree while ignoring the forest. What most people fall to understand is that our social system is designed to place a price tag on human life. The fact remains that while we have an unprecedented capability to create more with available resources than any other period in recorded history, in fact sufficient energy, food and water for all, it is completely inhuman that we still treat the necessities of life like food and water as commodities, depriving those who are unable to pay.
We are living in a completely outdated social system that has failed to keep up with the tremendous scientific and technological advances of the last 100 years. To quote from an article published in Time:
Genuinely revolutionary technological innovations are rare, and when they appear, there is a long time lag before they begin to transform the economy and daily life. The steam engine was used for nearly a century to pump water from British mines before it was successfully applied to manufacturing and transportation. The gasoline-powered car was invented in the 1880s, but mass automobile use had to wait until the 1920s in the U.S. and the 1950s and '60s in Europe and Japan. There was a similar delay between the invention of the computer and the microprocessor and the widespread adoption of the PC in the 1990s and 2000s.
That aside, the monetary system has existed for so long, founding the basis for many civilisations that we have been conditioned into accepting it as the final frontier. Definitely not. Humanity can do better than this. Besides the fact that a monetary system is designed to perpetuate debt, which is hinted at in the linked article, it is a system rigged in favour of the rich. For most of us living in developed countries, such a thought is heresy, after all, we have benefited the most under such a system. But for those who question the sweat and blood on which our system thrives on, these questions have to be asked.
While the WB/IMF regularly calls for "trade liberalisation", it practically turns a blind eye to the fact that the US and Europe subsidises their agricultural industry as much as a billion dollars a day. Then when these products are dumped in Third World countries, local farmers go bankrupt. Some turn to suicide as a way out while such a turn of events conveniently provide corporate sweatshops with a continuous supply of low-wage worker-slaves. There is so much corruption built into the system that if we want to even think about solving the world's social problems, we got to transcend it entirely.
See http://www.urgentevoke.com/video/former-economic-hitmen-john
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Comment by Ezra Ho on April 7, 2010 at 9:02am
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Comment by Mark Mulkerin on April 8, 2010 at 6:44am -
Much to consider. Thanks.
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Comment by Kevin DiVico on April 17, 2010 at 7:44am -
Thanks for posting this Cornelia - well done... an excellent example of "short term solutions causing long term and unexpected problems"...
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