Chapter 3 in: Bateman, M., Blankenburg, S. and Kozul-Wright, R. (2019) The Rise and
Fall of Global Microcredit: Development, Debt and Disillusion, (Eds), London:
IMPACTS OF THE MICROCREDIT MODEL
Does theory reflect actual practice?
[O]ne makes theory the servant of comprehending reality rather
than an excuse for ignoring it.
(Lazonick 2016: 93)
The aim of this chapter is to briefly reflect upon the significant divergence that
now exists between the theories of microcredit first promoted by Muhammad
Yunus, the universally acknowledged ‘father of microcredit’, and the actual reality
encountered on a daily-lived basis by the vast majority of the global poor. It
begins with Yunus’ initial claims for massive and immediate poverty reduction
through the income received from new self-employment ventures established by
the poor with the help of a microcredit. It explains that Yunus’ theory of change
was based on a famous fallacy known to economists as Say’s Law – the idea that
‘supply creates its own demand’. This major misunderstanding largely accounts
for why the microcredit model failed to make an immediate impact on poverty. It
then touches on the issue of the longer-run impact of microcredit, and to the fall-
back argument that microcredit ultimately helps in the longer term by establishing
a sustainable local economic and social development trajectory. Contrary to
neoliberal models of local development that assign a major role to the new entry of
any and all informal microenterprises and self-employment ventures, the chapter
points out that in reality only particular types of enterprises are actually capable of
promoting development, growth and, ultimately, poverty reduction; and they are
not the type of informal microenterprises and self-employment ventures supported
by microcredit. The chapter concludes by looking at the particularly chaotic and
destructive reality that was created as a result of the increasing commercialization
and deregulation, or ‘neoliberalization’, of the global microcredit sector that began
from the 1990s onwards. The adverse trajectory that has transpired very
significantly diverges from the rosy future predicted for the global poor by those
who modelled the potential outcomes of commercialized microcredit on neoliberal
The initial claims made for microcredit: lots of new jobs and massive poverty
The initial focus of the microcredit model’s appeal was born out of Muhammad
Yunus’ very specific early experience in the village of Jobra near Chittagong in
Bangladesh (see Yunus and Jolis, 1998). Yunus saw important potential for
poverty reduction in Jobra if he were able to provide a cheaper alternative to the
local money-lenders who traditionally offered expensive credit to those struggling
to survive through very simple informal activities. Famously providing $27 out of
his own pocket to loan to 42 individuals in Jobra (Counts, 2008: 58), he was
pleasantly surprised when the money was returned to him in full. This showed
Yunus that the poor were ‘bankable’ and could productively use and repay lower
cost micro- credit. Above all, Yunus felt that the many women whom he saw
living in poverty in Jobra would appreciate the opportunity to earn a little bit more
from their simple business activities – basket-making, street trading, preparing
simple food items, and the like – by being able to access cheaper microloans from
formal microcredit institutions (hereafter MCIs) of the type he was proposing. In a
now famous turn of phrase, it was said that these modest benefits would help to
‘empower’ the women involved.
While ‘displacing the local money-lender’ has been the desire of many down the
years (Graeber, 2011), this initial rationale for promoting the microcredit model
had a problem: it only suggested very limited benefits. Substituting formal lower-
cost microcredit for the more expensive informal money-lender microcredit might
perhaps raise incomes in the community a little, but it was not going to be the
‘poverty panacea’ that Yunus had already begun to claim that his microcredit
model would be in practice.1 Yunus therefore needed to significantly ramp up the
‘impact factor’ aspect of his microcredit model if it was going to be accepted by
the international development community.
Accordingly, Yunus abandoned the early substitution narrative and replaced it
with a much more dramatic narrative based on the supposed power of individual
entrepreneurship. Yunus’ ideas were consonant with the ongoing work half a
world away in Peru by the high-profile neoliberal economist, Hernando de Soto.
De Soto (1986) famously argued that the global poor were all ‘entrepreneurs in
waiting’ and they only needed a liberalized business environment and ‘for the state
to get out of their way’ for them to drive forward a wave of self-employment that
would soon see poverty eradicated. Yunus’ revised theory of change very much
agreed with de Soto’s claim that the global poor were virtually all ‘entrepreneurs
in waiting’ who desperately wanted to enter into individual entrepreneurial
activities in order to remedy their plight. And like de Soto, Yunus believed the
poor were constantly frustrated and blocked by unnecessary regulations and an
obstructionist bureaucracy. This was why the global poor could only very rarely
put into practice their energies, ideas and skills.
However, Yunus was of the opinion that the most important obstacle to greater
entrepreneurship by the poor was that they were short of start-up capital. Enter the
microcredit model. With the help of a microcredit, a poor individual could
establish an informal microenterprise or self-employment venture. This would
generate an income and, in time, Yunus argued, an individual escape from
poverty. The local community would prosper as well because new informal
microenterprises would employ other local (perhaps less entrepreneurial) people,
source inputs from other local enterprises, and so on. Summing up the supposedly
enormous potential of microcredit made possible by his own Grameen Bank
founded in 1983, Yunus (1989: 156) was to famously declare that ‘[a] Grameen-
type credit program opens up the door for limitless self-employment, and it can
effectively do it in a pocket of poverty amidst prosperity, or in a massive poverty
situation’ (our emphasis).
It also greatly helped in promoting Yunus’ ideas that they were very much in line
with the idealized vision of free market capitalism proposed by leading neo-
liberal economists such as Friedrich Hayek (1944) and Milton Friedman (1962).
Arguing that individual private entrepreneurship and the freedom to maximize
individual rewards were the primary, if not only, sources of development and
growth in a market society, Hayek and Friedman were key figures in giving rise to
the neoliberal revolution that took off at the international level from the early
1980s onwards. By openly resonating with such newly fashionable neoliberal
ideas, thereby to ‘bring capitalism down to the poor’, Yunus’ microcredit model
was perfectly positioned to catch the attention, and the funding, of the
international community. It all began to fall into place.
Yunus had thus succeeded in staking out an entirely new claim for his micro-
credit model; it would very quickly resolve poverty not so much through lower
interest rates, but because it would give rise to a wave of new informal micro-
enterprises and self-employment ventures, the income from which would help the
poor to escape their poverty once and for all. Such was the strength of his belief
that rapid progress would ensue that Yunus soon took to predicting that the next
generation would only be able to understand the concept of poverty by visiting
what he called a ‘poverty museum’.2
The painful reality on the ground: market saturation and ‘job churn’
It is very often forgotten that Yunus’ initial poverty reduction and employment
generation claims were quite vigorously refuted by his immediate peers in
Bangladesh.3Ahmad and Hossain (1984), for instance, pointed out that most parts
of Bangladesh, like virtually everywhere else in the Global South (ILO, 1972;
Hart, 1973) were becoming over-crowded with struggling informal
microenterprises and self-employment ventures. Thus, without any compensating
increase in local demand or purchasing power, stimulating an increase in this local
supply with the help of microcredit would result in even more intense local
competition, which would serve to push down the average profits and wages
enjoyed by those already supplying the items and services in question. So in spite
of there being some obvious gains enjoyed by a lucky few individuals supported
with a microcredit, increased competition would disadvantage existing members
of the informal enterprise community struggling to survive. Because some would
gain but some would lose, Yunus’ microcredit model could easily result is no
overall (or net) reduction in local poverty. Ahmad and Hossain therefore disagreed
with Yunus’ fundamental assumption that the provision of microcredit would
automatically lead to large net employment gains and poverty reduction progress
in the community.
Also reflecting this pessimistic view in Bangladesh at the time were Osmani
(1989) and Quasem (1991). Both reported that under the conditions of stagnant
demand that then prevailed in so many Bangladeshi communities, most informal
microenterprises were indeed struggling to locate sufficient clients. Pointedly,
many only survived by taking business and clients away from other struggling
informal microenterprises operating in the same sector and community. With the
jobs and income gains created by the new microcredit-supported microenterprises
pretty much offset by the job and income losses experienced by incumbent
microenterprises, both Osmani and Quasem argued that net employment and
income gains generated thanks to an increased supply of microcredit were actually
be a very unlikely outcome.
Yunus had been warned that his theory of microcredit-driven change was
fundamentally flawed. But he remained unmoved. Yet these warnings turned out
to be extremely prescient: the demand constraint did indeed turn out to be one of
the fundamental flaws in the microcredit model. In practice, two demand-related
outcomes worked to counter any meaningfully positive impact from microcredit.
The first of these is displacement. This is the situation where a new
microenterprise helped into operation by microcredit is able to survive and create
some new jobs, but it only manages to do so by eating into the local demand that
had been sup- porting an incumbent microenterprise, which is forced to contract
its own level of employment and lose revenue to a roughly similar degree. Such
negative impacts have long been documented in almost all of the locations where
microcredit has been adopted (see Bateman, 2010). More recently, even leading
microcredit advocates accept that displacement helps explain why individual
microcredit pro- grams do not automatically lead on to net job impacts at the
community level (for example, see Morduch et al., 2012).
The second negative factor here is exit (or enterprise closure). This is the situation
where a new or incumbent microenterprise is forced to close outright because of
the increased local competition caused by additional new entry. In general, new
entrants in the Global South do not survive for very long. A global survey by
Gomez (2008) showed that in general 75 per cent of new microenterprises do not
survive beyond two years, while McKenzie and Paffhausen (2017) show that
younger enterprises very often exit in their first year of operation. High exit rates
are a particularly acute problem in most of Africa (Page and Söderbom, 2012;
Patton, 2016; Nagler and Naudé, 2017).
Taking both displacement and exit factors into account inevitably means that far
fewer new jobs are actually created with the help of microcredit than Muhammad
Yunus insisted would be the case. In fact, the main outcome of microcredit-
stimulated new entry in practice, especially in the Global South, is often nothing
more than what has been termed ‘job churn’, the situation where potentially
positive impacts of new enterprise entry are almost entirely offset by negative dis-
placement and exit effects (Nightingale and Coad, 2014).
Even worse, another important downside factor related to ‘job churn’, needs to be
raised here. The end result of a microcredit-induced rise in new entry might well
be a net addition to the stock of microenterprises, and more jobs too, just as Yunus
and other microcredit advocates have argued. However, negative impacts
elsewhere can counteract, if not often entirely offset, these putative gains. As the
Canadian economist, John Kenneth Galbraith (1967), pointed out, unlike in the
world of big corporations that have the power to create their own demand (through
state procurement, advertising, etc.), small enterprises have very limited market
power. Free entry and competition in the world of small enterprises thus tend to do
their assigned job very well; incomes are driven down to the barest subsistence
level. This happens both because the prices of the goods and services supplied
generally decline on account of increased local competition, and because turnover
and revenue per individual microenterprise are also reduced as demand is shared
out among a larger number of units. What this means, in other words, is that
accelerated microenterprise entry will provide powerful impetus to reduce average
incomes across both new and incumbent microenterprises. As should be readily
apparent, this is not good for the poor.
Practice in many parts of the Global South today, just as much as in earlier times
in the now advanced capitalist countries,4 shows that this adverse market-driven
scenario is a quite regular outcome of increased new entry. In Mexico, for
instance, Miriam Bruhn (2011) found that new entry stimulated by a programme
reducing business registration requirements increased the total number of
enterprises by around 5 per cent, but it also decreased the income of all incumbent
enterprises by around 3 per cent. In some of the poorest parts of the city of
Medellin in Colombia, Bateman et al. (2011) found that a wave of microcredit-
supported microenterprises engaged in street trade led to a significant decline in
turnover per incumbent microenterprise, and so also their incomes. Considerable
resentment towards new entrants thus built up among the already struggling
owners of long- standing microenterprises, who claimed that they effectively have
to pay an additional ‘tax’ (in terms of reduced income) in order to create jobs for
the newcomers in new microenterprises. In more extreme cases, the negative
effect of new entry can be very destructive indeed. This was very much the case in
post-apartheid South Africa in the early 1990s, for example, where a rising supply
of microcredit created many new informal microenterprises in what were stagnant
markets (thanks partly to an austerity policy insisted upon by the World Bank).
This new wave of competition was one of the main factors that exerted significant
downward pressure on average informal sector incomes, and, astonishingly, by
2003 average incomes in the informal sector stood at less than one third of their
1995 value (see Bateman, Chapter 12, this volume).
Overall, as Mike Davis (2006) contends, microcredit policies that encourage or
effectively force hundreds of millions of desperate individuals to enter into
informal sector activities in a last-ditch attempt to survive can in practice serve to
worsen the economic, social and environmental conditions in the poorest
communities of the Global South. Microcredit is nothing but a form of Marie
Antoinette-style ‘let them eat cake’ insouciance. Ultra-intensive competition at the
‘bottom of the pyramid’ not only drives average incomes down, but is also linked
to a wide variety of other highly undesirable economic and social consequences
brought about by the burgeoning population of informal microenterprises and self-
employment ventures. These include turf wars, business coercion, corruption,
social violence and victimization (often on ethnic lines). At its very worst, Davis
(ibid.; 186) goes on to argue, policies that advocate unlimited new entry as the
solution to global poverty instead end up creating for the global poor nothing more
than ‘a living museum of human exploitation’. Desperation-driven microcredit-
supported, petty entrepreneurial activity is therefore not the solution to global
poverty, but should be seen instead, as Davis argues, as simply one of its ugliest
Yunus had therefore been wrong. But even so, his flawed but uplifting model of
microcredit-driven change dominated the impact debate for many years. Few
wished to raise the issue of there perhaps being a demand constraint that might
complicate the uplifting story Yunus was selling. One can only presume that this
refusal to accept reality was because Yunus’ theory predicted what everyone in the
international development community was desperately looking for – a market-
driven, private sector-led intervention that ‘brought capitalism down to the poor’.
Even today, reputable neoclassical economists continue to build complex
economic models of microcredit impact that omit any consideration of the crucial
demand constraint, the better, one must assume, to come to the required uplifting
conclusion (a good recent example would be Buera et al., 2012).5 Such individual
and institutional unwillingness to observe and build an economic model based
upon the real world is, unfortunately, one of the defining features of so much of
the academic study of the microcredit model in recent years.6
But what if local demand is rising?
However, what might we say in those cases where, for reasons unrelated to the
microcredit model, the level of local demand is actually increasing? This might
happen thanks to a new large factory being established, creating many new local
jobs, or where significant government spending on infrastructure transpires, or
where many individuals have been lucky enough to find well-paid employment
abroad and send cash home to their relatives. Might not microcredit work now
under such conditions? Indeed, many microcredit advocates have referred to this
more favourable local demand scenario as a roundabout way of denying the
fundamental flaw in Yunus’ microcredit model. For example, after arguing in the
1980s that microcredit could not work in Bangladesh due to diminishing returns
and local market saturation (see above), Osmani (Mahmud and Osmani, 2016)
later pointed to the growth of per capita income in Bangladesh from the 1990s
onwards as the reason why he eventually came round to believing microcredit
could actually work after all.
But does this increasing local demand scenario mean that microcredit has been
‘successful’ in addressing poverty? Not really. Centrally, it does not show that
microcredit actually causes local development and growth. Let us go back once
more to the case of Bangladesh raised by Osmani and others. It is now widely
accepted that there is no real evidence to confirm that country’s massively
expanding supply of microcredit actually caused its important poverty reduction
success (see Hossain, 2017: 181–193; see also Duvendack and Palmer-Jones,
2012). What the evidence shows instead is that the microcredit industry in
Bangladesh grew as rapidly as it did, especially from the early 2000s onwards,
largely by piggy-backing upon rising incomes facilitated by other factors (most
notably by growing remittance incomes and the rapid growth in garment factory
employment). In addition, it needs to be noted that micro- credit has increasingly
been all about supporting the consumption spending needs of the poor in
Bangladesh, including the need for food in the long period (termed Monga) before
the harvest arrived, not about the poor investing into a new or expanding
microenterprise as per the original theory of micro- credit (Cons and Paprocki,
2008; see also Maîtrot, Chapter 8, this volume). This fact made it even harder to
argue that microcredit could be causally related to on-going poverty reduction as
per Yunus’ model. The conclusion can only be reached that microcredit in
Bangladesh is very largely not causally related to its poverty reduction progress,
but mainly correlates with it. Thus, rising local demand does not ‘prove’ that the
microcredit model works after all.
Other very relevant examples of this ‘correlation but not causation’ scenario come
from two of the countries in Latin America covered in this volume. In the case of
Peru (see Bird, Chapter 4) and Brazil (see Feil and Slivnik, Chapter 5), significant
growth of the microcredit sector in recent times is very clearly linked to the rising
incomes enjoyed by the poor, made possible by the commodity boom enjoyed by
both countries from the early 2000s onwards. (The commodity boom is linked to
rising demand for raw material and agricultural outputs from a rapidly growing
China.) Judiciously taxing the main corporate beneficiaries of this boom allowed
pro-poor governments in both countries to introduce minimum wage legislation
and increase social entitlements (pensions, social grants, etc.). With rising
incomes, a great many marginally wealthier poor individuals were encouraged to
access a microcredit in order to bring forward their consumption goods spending
plans. The microcredit sector thus boomed. Predictably, however, with the
commodity boom now petering out as China’s growth slows, and so incomes and
social entitlements in both Latin American countries now being reduced
(drastically in Brazil, less so in Peru), the demand for microcredit has fallen
considerably while individual over-indebtedness and defaults have begun to rise
But much more important than this simple explanation as to why microcredit
growth might correlate with country success but does not cause it, however, is the
fact there are crucially important practical scale and scope economy reasons (dis-
cussed in the next section) to show that even if local demand is increasing for
whatever reason, it should not be captured by rafts of tiny informal micro-
enterprises and self-employment ventures supported by the microcredit model.
Yunus got it wrong
It is now easy to see that Yunus made a very fundamental and far-reaching error in
theorizing enormous benefits for the poor if they engaged with the microcredit
model. Yunus misunderstood the nature of markets, competition, demand
constraints and the crucially important ‘zero-sum’ aspects to local development
interventions under ultra-competitive capitalism in the Global South. By wrongly
assuming that programmatically increasing the local supply of simple goods and
services typically used by the poor would always find or create the local demand
(purchasing power) required to fully absorb this increased supply, Yunus had
inadvertently fallen headfirst into believing in one of the most famous fallacies in
economic history: Say’s Law, the idea that ‘supply creates its own demand’.7
Alice Amsden (2010) provides one of the most incisive explanations for this once
common misunderstanding. Always one of the most astute observers of
development processes and impacts in the Global South, Amsden pointed out that
poverty generally does not exist today because of some supposed shortage of the
goods and services that the poor need to survive. Poverty exists because the poor
do not possess the financial resources to purchase the goods and services which
they need to ensure their daily survival. These goods and services are often very
widely available to the poor, but at a price they cannot afford. Poverty is thus not a
supply-side problem, as Yunus and so many others in the microcredit sector
contend, but much more of a demand-side problem – a lack of effective demand
on the part of the poor prohibits them from obtaining what they need to ensure a
minimum standard of living. Without providing the poor with more financial
resources to use as consumers, Amsden went on to show, virtually all supply-side
programs are inevitably predestined to fail. These include such projects as job
training, business education and credit. For example, improving the conditions for
young people in Africa to engage in self-employment activity might indeed help
some of them into the workforce, but if we realistically assume there is no change
in local demand, this advancement by some of Africa’s youth will likely come at
the expense of older, less-qualified, self-employed individuals in Africa who will
be displaced from the workforce as a result (see Flynn and Sumberg, 2018).
All told, it is now clear that the microcredit model pioneered by Muhammad
Yunus was built upon a fundamentally flawed foundation; the false belief that an
increased local supply of simple items and services would never run up against a
local demand constraint. In order to better able to ‘sell’ the flawed microcredit
model to key western governments and the international development community,
Yunus was forced to flout the important imperative demanded by Lazonick (see
the epigraph) that, above all, theory should try to comprehend reality rather than
ignore it, still less create a largely false reality.
But might not commercialized microcredit promote development and growth
in the longer run?
The lack of evidence of any real positive long-term impact on poverty in the
Global South contradicted Yunus’ uplifting theory of change, a fact that even
many long-standing microcredit advocates came around to grudgingly accept (for
example, Banerjee and Duflo, 2011: 157–181; Roodman, 2012). However, the
international development community and many western governments were by no
means discouraged in their support for the microcredit model. But to justify
continued support for microcredit going forward required a revised theory of
Finance for development in theory
Our understanding of the role of finance in promoting development has made great
strides in recent years. It is now widely accepted that the financial system can
greatly impact upon development in a positive way through its support for
enterprise development (for example, see King and Levine, 1993). Developing an
appropriate financial system capable of financing enterprise development is there-
fore paramount if a country, region or locality is to enjoy sustainable development
and growth. But the question was, How to achieve this goal? The answer
according to neoliberal financial theory was clear: financial institutions would
work best at promoting enterprise development if they were private sector-led,
strongly commercialized and able to operate in a thoroughly liberalized business
environment (for example, see McKinnon, 1973: Shaw, 1973). As the global
neoliberal project gained steam in the 1980s with the election of neoliberal-
oriented governments in the UK in 1979 and then in the USA in 1980, this market-
driven approach to financial policy and enterprise development inevitably became
the globally dominant viewpoint.
Neoliberal financial theory, not surprisingly, also provided much of the theoretical
impetus behind the 1990s drive to commercialize microcredit. Yunus’ original
non-profit microcredit model was summarily abandoned and replaced with a new
market-driven for-profit microcredit model. The move to commercialize and
privatize the global microcredit model began in the early 1990s. The momentum
was very much provided by the World Bank and the US government’s aid
assistance arm, USAID, both of which were smitten by neoliberal financial
theories that postulated that a more efficient financial institution would result. The
new commercialized microcredit model would bring about the vastly increased
supply of microcredit required to turn every poor individual into a successful
micro-entrepreneur. The end result, according to its leading lights in the
microcredit sector (most notably Otero and Rhyne, 1994, and Robinson, 2001),
would be a ‘new world’ of ‘healthy’ MCIs contributing to massive poverty
reduction. While Yunus was eventually forced into converting his own Grameen
Bank into a for-profit entity, which he did in 2002 under the so-called ‘Grameen II
project’ (see Hulme, 2008), it was felt that he would nevertheless finally be proved
right that microcredit per se could be a game-changing intervention for the global
As correctly predicted, the supply of microcredit soon began to rise all over the
Global South. Several of the pioneering countries (notably Bangladesh and
Bolivia) quickly managed to achieve the ‘holy grail’ – every poor individual that
wanted to access a microcredit could very easily do so. The results of such a
massively increased supply of microcredit were keenly awaited. However, hopes
that a ‘new world’ of massive poverty reduction were soon dashed. In fact, it soon
became clear that the turbo-charged commercialized microcredit model in practice
was even more problematic than the original non-profit microcredit model
pioneered by Muhammad Yunus. As the next section will show, the
commercialized micro- credit model has very destructively impacted on local
communities in the Global South. But before explaining why this is so, it helps to
first highlight another approach to the financial sector and financing enterprise
development that also burst on to the scene in the 1980s, one that was based on
almost the exact opposite parameters to the neoliberal approach to finance. This
heterodox approach to financing enterprise development greatly helps to provide
the best explanatory framework to account for why commercialized microcredit
was such a dramatic failure as development policy.
The new non-neoliberal approach to development finance arose out of the
staggering success of the East Asian ‘miracle’ economies, starting with Japan (see
Johnson, 1982) and soon was followed by equally impressive growth in South
Korea and Taiwan (Amsden 1989; Wade, 1990). Rather than allowing markets
and the private sector to largely determine the allocation of finance based on their
own narrow profit calculus, these three countries instead built up a raft of very
effective state advisory and planning bodies linked to state financial institutions.
This combination ended up providing a very powerful ‘developmental’ method of
financial intermediation. This methodology, and set of financial institutions, were
just a part of what became known as the ‘developmental state’ model. The
developmental state acted as a very efficient mechanism for intermediating
financial resources into those enterprises and technologies most capable of
generating economic growth.
As Alice Amsden (2001) showed, a key part of the developmental state model
everywhere in Asia, and in other ‘late-comer’ developing countries as well (such
as in Latin America), was the establishment of competent national and local state
institutions that could identify and then financially support those enterprise
projects linked to rapid and sustainable development and growth, while also,
importantly, rejecting those enterprise projects not in this important category (see
also Nelson and Winter, 1982; Evans, 1995; Chang, 2006). Distilling the evidence
provided by the developmental state experience as a whole, it is possible to
conclude that the ‘right’ type of enterprise to support is a small, medium or large
enterprise that has some or all of the following characteristics:
_ formally registered and operating according to all legal requirements;
_ operates at, or well above, the minimum efficient scale;
_ as much as possible operating on the technology frontier;
_ innovation- and skills-driven rather than (just) low labour cost-driven;
_ horizontally (clusters, networks) and vertically (subcontracting, supply
chains, public procurement links) connected to other organizations;
_ able to continually facilitate the creation of new organizational routines
Importantly, it also became clear from the developmental state literature what
were the ‘wrong’ enterprises to financially support; those that do not possess any
of the important characteristics listed above – in other words, low or no
technology informal microenterprises and self-employment ventures (for example,
see Baumol, 1990; Naudé, 2009; Bateman, 2010; Pagés, 2010; Bateman and
Chang, 2012). As Chang (2010) makes clear, promoting longer-term development
is something that is simply not in the gift of the informal microenterprise or self-
employment venture. These types of enterprises are overwhelmingly associated
with unproductive forms of entrepreneurship of the kind that, no matter the
generally large numbers, simply cannot kick-start economic development. Even
worse, the rapid initial proliferation, but generally short life-spans and zero growth
prospects of informal microenterprises and self-employment ventures, have all too
often created a set of adverse ‘initial conditions’ that, through a number of
different mechanisms and feedback loops, actually act to block sustainable local
The development economist Eric Reinert (2007) provided one of the very best
formal explanations of the general problem raised by Chang. Reinert points out
that the programmed expansion of ultra-low productivity business units under-
taking diminishing returns activities – which is almost the definition of what
microcredit is tasked to achieve – can only destroy the local economy. This is the
inevitable outcome in practice whenever important scale economies are lost,
technologies suitable at certain volumes of activity are abandoned, and important
efficiency-enhancing vertical and horizontal inter-enterprise connections are
inoperable. Reinert sums up the problem (ibid.: 171) as one where:
Systems based on increasing returns, synergies and systematic effects
all require a critical mass; the need for scale and volume creates a
‘minimum efficient size’. When the process of expansion is put in
reverse and the necessary mass and scale disappears, the system will
Importantly, the general retrogression process sketched out by Reinert almost
exactly describes what we are seeing in all locations – at national, regional and
local levels – where the microcredit model has penetrated the most. By pro-
actively intermediating scarce financial resources into the least productive
enterprises, therefore, we might expect that the microcredit model will only
succeed in de-industrializing, primitivizing, informalizing and disconnecting the
local enterprise structure. A state of under-development and poverty is likely to be
It should also be pointed out once more, linking to the discussion above, that even
in conditions where local demand is expanding for reasons external to the
microcredit model, the basic structural problem identified here largely remains.
The proliferation and survival of many more informal microenterprises that
increasing local demand will enable will still undermine the functioning of the
local economy. This problem plays out for reasons to do with the limited scale and
scope of a microenterprise that (by definition) means it cannot reap economies of
scale, creatively innovate, productively deploy technology, connect with other
enterprises, and so on. In other words, even if the microenterprise sector grows in
numbers alongside rising demand, this locks in place an unproductive atomized
local economic structure that, as per the reasons outlined above, can only serve to
hinder and block the effort to achieve sustainable economic development and
growth. A country or continent (for example, Africa) can thus possess a massive
and growing informal microenterprise and self-employment sector but, precisely
because of this fact, it will have almost no chance of achieving sustainable
development, growth and meaningful poverty reduction.
Reinert evocatively concluded that the end result of wilfully absorbing (or
wasting) scarce financial resources merely to expand the supply of ultra-low
productivity units and diminishing returns activities is akin to achieving the
expected result of the Morgenthau Plan. This is the ‘anti-development’ plan
formulated during World War II in order to permanently emasculate the post-war
German economy and reduce it to such a primitive status that the country would
be incapable of waging war ever again (ibid.: 179–184). The Morgenthau Plan was
centrally based on funding the proliferation of only the most primitive of small
enterprises and agricultural operations, combined with a ban on industrial
research.8 Similarly, rather than actively shepherding scarce financial resources
into promoting bottom-up development through support for formal enterprises
with the most potential to grow and reap productivity gains, the microcredit model
helps to propel the local economy in completely the other direction. The micro-
credit model is a Morgenthau Plan-style ‘anti-development’ plan that is being
carried out for real.
Market-driven microcredit into the longer term acts as a Morgenthau Plan in
There is substantial empirical evidence to confirm that microcredit has not worked
out as neoliberal financial theory suggested it would in the longer term and that, in
fact, it displays quite alarming similarities in practice to the ‘anti-developmental’
Morgenthau Plan just outlined. Countries, regions and localities with a significant
microcredit sector inevitably intermediate a much greater proportion of available
(scarce) financial resources into the very least productive enterprises – informal
microenterprises and self-employment ventures – and vice versa (Bateman, 2010:
see also Distinguin et al., 2016), and also into consumption spending, and in so
doing considerably undermine their own development and growth prospects. To
illustrate this damaging phenomenon, let us look again at the real experience in the
Global South, which is far removed from that predicted by standard neoliberal
financial models that suggest efficient financial intermediation. It is appropriate to
return first of all to the experience of Bangladesh.
The volume of microloans provided by the big MCIs, such as Grameen Bank,
ASA and BRAC, quadrupled between 2000 and 2013. Rather than responding to
local demand for microcredit, it is widely accepted that much of this growth
depended upon the exertion of extreme pressure on poor individuals to accept a
microcredit when logic dictated that they would inevitably have enormous
difficulty repaying it. New clients might be already over-indebted, have several
microloans they are struggling to repay, or their business idea might be obviously
unprofitable, but they are pushed to take on more microcredit nevertheless. In
financial circles advancing credit under such circumstances is defined as ‘reckless
lending’ and it is unethical and very often illegal. In Bangladesh, researchers
report (see Maîtrot, Chapter 8, this volume; see also Karim, 2011), reckless
lending is sanctioned by head office management, which sees rapid growth as
necessary to earn salary increases and performance bonuses. Implementing such
an approach in the field is left to individual loan officers who face- to-face put
direct pressure on poor clients to go deeper and permanently into debt
(euphemistically known as ‘topping up’ – see Rutherford, 2000). As with senior
management, loan officers also hope to secure for themselves a promotion or
bonus payment, or simply just keep their job. Reckless expansion in this manner
predictably created a major individual over-indebtedness problem in Bangladesh.
This over-indebtedness problem was only very narrowly averted from becoming a
full-scale crash thanks to external intervention demanding that MCI expansion
slow down and they begin to share the market (see the discussion in Chen and
At the very same time as this reckless expansion of the microcredit sector was
underway, however, it was also being regularly reported that Bangladesh’s SME
sector was suffering from a major shortage of financial support. This, for example,
was one of the findings of research commissioned by the UK government’s aid
arm, DFID (see DFID, 2008), more recently confirmed by the World Bank (2016:
27) as well. Formal banking institutions in Bangladesh show little interest in SME
financing. It was already comparatively low in the 1990s, and it began to decline
considerably in the early 2010s.9 This persistent scarcity of funding for formal
SMEs in Bangladesh is one of the key reasons that accounts why, over the last
forty years or so, Bangladesh’s SME sector has been quite unable to make a more
decisive contribution to development and growth. Instead, Bangladesh has ended
up with what is now routinely described as the problem of the ‘missing middle’ –
the country’s ability to create millions of unproductive informal microenterprises
and self-employment ventures, which exist alongside a few large companies, but
its almost total failure to establish a dynamic technology-driven formal small and
medium-sized enterprise (SME) sector even remotely comparable to any of its
The reason for the ‘missing middle’ problem in Bangladesh is a ‘crowding out’
scenario created by the country’s increasingly market-driven financial system
whereby the most unproductive informal microenterprises and poor households
are sought out and over-filled with microcredit, but the most productive formal
SMEs are starved of financial support. The reason for such a phenomenon is that
financing informal microenterprises and self-employment ventures is highly
profitable (thanks to high interest rates) and low risk (thanks to the pressure to
repay routinely exerted on borrowers). In comparison, financing SMEs is a high
risk and low profit activity. Financial resources are inevitably channelled into
those enterprises that generate the highest and most secure return. The result is that
in spite of much progress in recent years (see Hossain, 2017), Bangladesh still
very notably lags behind its Asian neighbours in terms of developing its formal
SME sector, so it also inevitably lags behind in terms of development, growth and
For perhaps the most unexpected example of the problems created by an over-
reliance on microcredit as a development intervention, we need look no further
than to the iconic village of Jobra where Muhammad Yunus effectively launched
the global microcredit movement in the 1980s. Except for a few bright spots of
wealth that could almost all be traced back to an individual having secured a
period of formal employment abroad, especially in the Gulf States, by the mid-
2000s the village of Jobra was found to be just as poor and under-developed as it
was in the 1970s.10 One reason found for this lack of progress was that very few of
the microloans taken out for income-generating purposes actually went on to
become successful microenterprises, still less grew into formal SMEs. Since
almost all of the new starts supported by microcredit involved very simple
activities with no real growth or diversification potential, this was only to be
expected. Even worse, the only visible change of any note that was undoubtedly
attributable to the arrival of Yunus’ microcredit model in the early 1980s was a
decidedly negative one: rising individual over-indebtedness. As was becoming the
norm right across Bangladesh, there had been a quite dramatic rise in the number
of cases of serious individual over-indebtedness in Jobra (Chowdhury 2007). Jobra
therefore stands out as one of the best local examples of why microcredit has
failed as a development intervention.
Neighbouring India has also encountered the very same deleterious financial
sector-driven ‘crowding out’ problem registered in Bangladesh. Aneel Karnani
(2011) has very usefully documented the massive financial support supplied to
India’s ‘survivalist’ informal microenterprise sector and subsistence farming plots,
especially in more recent times, thanks to India’s extensive microcredit sector. He
notes that this high level of financial support stands in sharp contrast to the gradual
withering away these last two decades in the level of financial support (especially
by the state) offered to formal SMEs and semi-commercial family farms. This
came about, again as in Bangladesh, thanks to the decision to ‘neoliberalize’
India’s financial system in the early 1990s. The inevitable result is that the formal
SME sector began to decline just as the informal sector began to blossom into
what is now today probably the world’s largest informal sector (representing
around half of GDP and a massive 90 per cent of non-agricultural employment).
The chances of sustainable development have inevitably been destroyed by this
informalization trajectory. Chen and Raveendran (2014) show how it happens by
reporting on the four groups of informal sector workers that have most increased
in India in recent years, and which now represent a quarter of the total urban
workforce; these are: (1) domestic workers; (2) home-based workers; (3) street
vendors; and (4) waste pickers. As should be clear from the argument outlined
above, all of these petty activities are quite ineffective vehicles in terms of
promoting sustainable development and growth.
With such trends underway, the inevitable result of India’s expansion of the
informal sector should not be a surprise. Like Bangladesh, India now possesses a
‘missing middle’ defined by its hundreds of millions of ‘survivalist’ informal
microenterprises and self-employment ventures, a handful of large private and
public companies, but it has virtually nothing in between. Such a distorted and
inefficient economic structure has very severely undermined India’s chances of
achieving the needed structural transformation that will create the conditions for
development and growth. This problem manifests itself both in terms of the failure
to directly supply the needs of India’s growing middle-class consumers (most such
goods therefore have to be imported) and in failing to create a high quality and
cost-effective subcontracting base that can usefully serve its large industrial
companies. Overall, the ‘missing middle’ problem accounts for why India’s
poverty reduction effort has been far less unsuccessful to date than in most other
countries (see UNDP, 2010).11
Cambodia also stands out as one of the Asian countries that has used its limited
financial resources to stimulate a flood of new informal microenterprises and
hyper-competition at the local level, but at the direct cost of seeing its formal SME
sector remain seriously under-funded (see Bateman, Chapter 9, this volume). The
massive increase in the supply of high interest rate microcredit in Cambodia has
been unprecedented, driven forward by a flood of foreign investment into the
microcredit sector, as well as significant local savings mobilization by the
country’s ‘top seven’ local deposit-taking MCIs. When it became clear that its
microcredit sector was a hugely profitable area to work and invest in, it is not
surprising that during this boom period in Cambodia financial support to the
formal SME sector waned considerably. The result is that Cambodia’s SME sector
is today one of the weakest and technologically most primitive in the entire South-
East Asia region.
Turning to Latin America, we find that very similar structural problems have also
arisen (for a summary, see Bateman, 2013b). If we first step back a little to note
that the Import Substitution Industrialization (ISI) model that dominated Latin
American development policy after 1945 until the early 1980s had important
overall successes (Amsden, 2004), we can begin to understand why. One of the
big successes of the ISI model, as Amsden (2001: 154) specifically noted, was the
extent to which it was able to catalyze into existence almost everywhere on the
continent a more technology-driven and growth-oriented formal SME sector, not
least thanks to local content agreements that channelled large company demand,
skills and technologies into local SMEs. The expanded formal SME sector was
important in its own right, in terms of decent jobs created and its ability to raise
average income levels in the community. But it was also decisive in terms of
technologies upgraded, innovations created, skills diffused, and its very specific
role in productivity-raising, sub-contracting, clustering and networking
connections involving other local enterprises as well as foreign corporations. Of
course, some Latin American countries advanced more than others under the ISI
framework, and the limited focus on promoting exports is now seen as one of the
biggest operational mistakes made during the period of ISI (ibid.). For example,
Brazil, Mexico and Chile did well thanks to much state initiative and export
success based on ISI principles, whereas Peru did not.
However, much of the important progress achieved under the ISI concept was
gradually undone from the 1980s onwards as the financial sector was increasingly
liberalized and restructured along neoliberal market-driven lines. The policy
model behind this transition was known in Latin America as the ‘Washington
Consensus’, and a central aspect of it was to expand the private financial sector’s
operational freedom and its ability to distinguish between financing different types
of enterprise according to its own narrow profit and loss calculus. Inevitably, as
elsewhere, Latin America’s private financial institutions began to favour short-
term, highly profitable and less risky microcredit applications over less profitable
and more risky longer-term projects financing larger formal enterprises. As a
result, informal microenterprises and self-employment ventures began to
massively proliferate thanks to the increased supply of microcredit, while formal
SMEs struggled to advance with less capital, and so also less access to new
technologies and innovations (and also less encouragement from the state). The
negative or ‘anti-developmental’ aspects of this new market- driven financial
intermediation approach in Latin America soon became obvious to a growing
number of analysts both outside and then, as we shall see, inside the main
neoliberal-oriented international development institutions as well.
Consider first the example of Mexico where, since the 1980s, significant financial
resources have effectively been diverted into the least productive economic
activities undertaken by informal microenterprises and self-employment ventures.
It is no surprise, as Levy (2007) maintains, that one can then point to the fact that
an informalization and infantilization trajectory has become embedded in the
Mexican economy, and that this largely helps account for Mexico’s on-going low
productivity, low growth and extensive poverty problems. Levy (ibid.) specifically
points to the central problem of, ‘Over-employment and over-investment in small
informal firms that under-exploit advantages of size, invest little in technology
adoption and worker training.’ The overall result is that important oil and gas
sector-financed gains achieved from the 1960s onwards, thanks to investments in
technology-based SME development, were virtually all wiped out, as funds were
diverted into expanding the unproductive informal sector (see Cypher and Delgado
Wise, 2010; see also Correa and Vidal, Chapter 7, this volume).
As one of the pioneering countries in Latin America with regard to
commercialized microcredit (Rhyne, 2001), Bolivia has also inevitably been
subject to the microcredit-driven ‘anti-developmental’ trajectory encountered in
Mexico. Attempts in the 1960s and 1970s to promote an industrial upgrading and
industrialization trajectory were only just making progress when, from the 1980s
onwards, they were progressively abandoned under the Structural Adjustment
Program (SAP) designed by the World Bank (Velazco-Reckling, 2015). Thereafter
Bolivia’s scarce financial resources for enterprise development were increasingly
intermediated by the market and private financial institutions, and so inevitably
into the high interest rate-paying informal sector. Indeed, nowhere more than in
Bolivia has the market-driven microcredit model created the conditions for the
destruction of the local economy. The supply of microcredit rose from almost
nothing in the 1980s to account for as much as 37 per cent of the total financial
sector by 2012 (Vogel, 2012). Inevitably Bolivia began to suffer from a serious
‘crowding out’ effect that began to undermine its formal SME sector. Evidence for
this comes from the IFC’s 2011 Enterprise Survey in Bolivia, for example, in
which we find that nearly 38 per cent of all formal enterprises identified the unfair
practices of competitors in the informal sector as the most important constraint to
their growth (World Bank, 2011).12 From this and other data Vargas (2012: 23)
concluded that ‘informality represents the most important obstacle for firms in
Bolivia’. Because they are increasingly forced to operate in a hostile sea of
unproductive microenterprises and self-employment ventures, the most potentially
productive formal enterprises find it immensely difficult to develop and grow
sustainably. The overall result of the quite spectacular rise of the microcredit
sector in Bolivia has therefore been to help create a no-growth ‘bazaar economy’
of quite astonishing proportions existing alongside a dramatically weakened and
capital- starved formal SME sector.
Importantly, the neoliberal-oriented Inter-American Development Bank (IDB),
one of the largest suppliers of funding and technical advice for microcredit
programmes in Latin America, appears to have finally recognized the fundamental
problem just put forward. The thesis advanced by the contributors to Pagés (2010)
is that the main factor creating the extreme poverty and under-development
problems that arose in Latin America between 1980 and 2000 (i.e., during the high
period of the Washington Consensus) was the increasingly private sector-managed
financial intermediation process. From the 1980s onwards, this served to
intermediate scarce financial resources into the most unproductive informal
microenterprises and self-employment ventures, while also effectively starving the
much more productive formal SMEs and larger companies capable of leading the
industrial upgrading and structural transformation process.
While refusing to mention the word ‘microcredit’ directly,13 the problem in Latin
America was described in the Pagés volume in often quite stunning language that
belied the IDB’s overall attachment to the neoliberal agenda. For example, it is
well known that Latin America’s private sector-led deregulated market-driven
financial intermediation model, very much the intended creation of the neoliberal-
oriented IDB and World Bank (see Williamson, 1994) has proved to be deeply
damaging to the region (Weisbrot, 2006). But, astonishingly, it is also very much
described thus in Pagés. For example, Latin America’s financial intermediation
structures were seen as ineffective because (Pagés, 2010: 6) they contributed to
‘the pulverisation of economic activity into millions of tiny enterprises with low
productivity’ and because ‘when credit is granted to unproductive enterprises, it
perpetuates the misallocation of effort, work, and capital that reduces a country’s
productivity’ (ibid.: 9). The conclusion was therefore pretty obvious (ibid.: 6); ‘the
overwhelming presence of small companies and self-employed workers (in Latin
America)’ – otherwise a sign that the microcredit sector has been successful in its
declared mission to increase self-employment – was ‘... a sign of failure, not of
success’ (italics added). One would be hard-pressed to find a more unequivocal
rejection of the basic principles of market-driven financial intermediation, and so
also the market-driven microcredit model that it gave rise to, than this.
Finally, we can turn to Africa where many examples of the destructive longer-run
‘anti-development’ nature of microcredit have become quite glaringly apparent of
late. The overall situation is well summed up in a major report on business
development in Africa prepared by Thompson et al. (2017: 6), who pointed out
There is a ‘missing middle’ in business financing in Africa. While
there are a wide variety of funding vehicles for micro-enterprise, and
several major financial institutions that will support larger
investments, there is a gap in the availability of accessible finance at
a scale appropriate for building up SMEs. This is important, because
it is growing existing companies – rather than developing start-ups –
that drives productivity growth.
Very many of Africa’s commercial banks are shifting out of SME lending and into
microcredit and consumer finance (see Tyson, 2016). This problem is particularly
acute in South Africa. As Bateman (Chapter 12, this volume: see also Bateman,
2015) points out, post-apartheid South Africa’s initially celebrated engagement
with microcredit soon turned into a mechanism whereby local industrial
development progress and structural transformation were frustrated and sent into
reverse. For reasons of profitability, the financial sector took the lead in
intermediating South Africa’s financial resources into informal microenterprises
and consumption spending, especially in the shape of two large microcredit banks
(Capitec Bank and African Bank), while gradually shutting down many traditional
forms of productive lending to SMEs because of the comparative unprofitability
and high risk of such activities. Along similar lines, Ahmed et al. (2015) point to
the rapid growth of the hugely unproductive informal sector in Uganda and report
that this growth was only made possible because of the rapid growth in the supply
of microcredit, an increased supply that was funded in part by the concomitant
reduction in financial support for the lower profit, formal SME sector. The
resulting shift in employment away from SMEs and large companies over to
informal microenterprises in the last ten years in Uganda, the authors conclude, is
one of the principal factors holding back productivity gains, and so also that
country’s growth and development.
Overall, the evidence to show that in the longer term the microcredit model has
played a positive developmental role is therefore just as weak as the evidence to
confirm that it has a positive net short-run impact on employment and poverty.
The increasing intermediation of scarce financial resources into the microcredit
sector, and then into informal microenterprises and self-employment ventures, in
fact, actually stands as one of the most destructive longer-term trajectories
catalyzed into existence by the turn to commercialization in the 1980s.
Important additional Wall Street-style outcomes from commercialization
The last section showed that the longer-term impact of the commercialized
microcredit model throughout the Global South has been extremely problematic, if
not a catastrophe for many of the countries that most enthusiastically engaged with
it. However, this final section shows that the already significant gap between the
neoliberal financial theory of microcredit and the actual practice is even wider
than just described. This is because the fundamental role of particular types of
finance in building (or not) sustainable development and growth was not just
misunderstood by the international development community, as I have shown
above, but so too was the all-too-often wider destructive nature of liberalized
financial markets and profit incentives under capitalism (on the key elements of
this destruction, see Galbraith, 2014). As with the many economists who
supported the disastrous actions of the Wall Street bankers in the run-up to the
global financial crisis that erupted in 2008, a list notably including the former US
Fed governor, Ben Bernanke (see Mirowski, 2013), similar miscalculations with
equally disastrous results were made by key microcredit theorists and advocates
operating in the Global South.
Crucially, key individuals and institutions working and investing in the micro-
credit sector were deemed to be always selfless, disciplined and ethical – as were
Wall Street bankers at one time! – when in fact far too many operating in the
global microcredit sector were single-mindedly engaged in maximizing, at any
cost and by any means possible, their own financial interests. One need only have
looked back to the Great Depression that began on Wall Street in 1929 (Minsky,
1986), to the Savings and Loans crisis in the USA in the 1980s (Black, 2005), or
to the demutualization and then collapse of the UK building society sector in the
1990s (Bateman, 2013c), to have been forewarned about the potentially
destructive impact of a financial institution operating in a liberalized business
environment. Among other things, under neoliberal conditions of unlimited private
incentives and extensive deregulation, economic history shows quite conclusively
that it is actually almost impossible to ensure that a financial institution will lend
Microcredit advocates were seemingly determined to ignore all of these and other
warnings from financial history concerning the destructive potential of
deregulation and liberalized markets (such as Polanyi, 1944; Galbraith, 1954).
Instead, since the early 1990s the international development community has
insisted that MCIs must increasingly be commercialized, privatized and allowed to
operate in an extensively deregulated environment. Predictably, reckless lending
soon emerged to become one of the major destructive impacts of the microcredit
model, quickly precipitating microcredit saturation and mass individual over-
indebtedness in the Global South. Thereafter, regular ‘microcredit meltdowns’
emerged as the inevitable crescendo.
Very appropriately, given its vanguard role in the promotion of commercialized
microcredit, the very first microcredit sector crisis emerged in Bolivia (see Rhyne,
2001). Following the lead taken by Bolivia, and as intended by the international
development community, a whole host of countries in the Global South followed
suit and allowed the extensive commercialization of their own microcredit sectors.
Within a decade these countries were experiencing their own microcredit crises
(see Bateman, 2010; Guérin et al., 2015). The chapters in this volume highlight
many of these crises; those that have emerged (Morocco, South Africa, the Indian
state of Andhra Pradesh), have been only very narrowly averted (Bangladesh), or
else remain a distinct possibility that governments are desperately trying to avert
(Cambodia, Colombia, Mexico, Peru).
Mass over-indebtedness and the eventual microcredit crises they precipitate have
been very deeply damaging right across the Global South. In the worst cases, the
entire financial system has been put at risk as a result of reckless lending in the
microcredit sector. This was the case in South Africa in 2015, for example (see
Bateman, Chapter 12, this volume). In 2014, the largest MCI in the country –
African Bank – collapsed and a US$1.6 billion bail-out package mainly funded by
the South African government was required to bring it back to life. Otherwise, it
was feared, the entire financial system might collapse (in the end the result of the
African Bank affair was the down- grading of South Africa’s credit rating, but this
was still hugely damaging by raising the cost of international loans). In India, as
Mader (Chapter 10, this volume) shows, after much prevarication and delay, the
government in the state of Andhra Pradesh was eventually forced to take decisive
action to deal with the huge microcredit bubble that had emerged in the state,
which was at one time threatening to bring the entire financial system down. But
failing to prevent the growth of the microcredit bubble in the very first place
created huge problems for the poor, and then even more problems when the state
government finally had no other option in 2010 but to pop the bubble through an
ordinance that dramatically halted all further microloans (see Bateman,
Blankenburg and Kozul-Wright, Chapter 1, note 10). In other cases, the state is
eventually forced into taking action in the form of large bail-outs and costly
restructuring and merger programmes, thus giving rise to the familiar Wall Street
problem (see Faroohar, 2017) that MCIs and their managers and owners
appropriate the profit during the boom, but the state is required to pick up the bill
when it all goes wrong.
Another even more deleterious impact of the commercialization of microcredit has
taken the form of the rise of exploitative accumulation practices, or what Harvey
(2004) famously termed, ‘accumulation by dispossession’. For example, Mader
(2015: 118) points out that since 1995 the global microcredit sector has withdrawn
up to US$125 billion from poor communities in the Global South in the form of
interest payments on microloans. Further large amounts of value have been
withdrawn in the form of dividends, capital appreciation, over-generous
management fees and bonuses, subsidies for the host government (especially in the
event of failure), and other Wall Street-style reward structures. Given that the
discussion above has shown microcredit has had no real positive impact on global
poverty in the short term, and that in the longer term it has served to undermine
and block the process of sustainable development, appropriating this value
originating in the poorest communities essentially serves no other purpose than to
enrich the narrow financial elite that owns and controls the global microcredit
The commercialization of microcredit has, in short, produced a whole host of
negative impact trajectories, few of which have been adequately modelled or
theorized by mainstream researchers, still less taken on board by microcredit
advocates and MCIs. As with regard to modelling the global economy in general
(see Romer, 2016), neoclassical economic and financial theory has proved itself to
be hopelessly inadequate at modelling and predicting the outputs and behaviour of
individuals and institutions involved in the commercialized microcredit sector.
This chapter has shown that the basic theory of microcredit associated with the
pioneering work of Dr Muhammad Yunus in Bangladesh was fundamentally
flawed, refusing, among other things, to accept that demand constraints exist in
practice. In the face of its failure to address poverty, more sophisticated theories of
change then had to be designed to continue to justify the microcredit model as a
long-term development intervention, but these too were seriously flawed.
Particularly in view of the experience of the East Asian ‘developmental state’
model, and specifically its creation of a set of national and local state financial
institutions able to promote enterprise development with great success, it is not
surprising that the microcredit model began to be portrayed by some as an ‘anti-
developmental’ intervention designed (perhaps inadvertently, or perhaps not) to
‘under-develop’ the poor countries in the Global South to the benefit of elites in
the Global North. Finally, the neoliberal theories used to justify the huge drive to
commercialize the global microcredit sector from the 1990s onwards were found
to be just as misguided and self-serving as the ‘efficient market’ theories that
allowed Wall Street bankers to come so close to destroying the entire global
economy in 2008.
Remarkably, however, the microcredit model continues to attract support within
the international development community, if not continued celebration in the
Washington-based development institutions, although one must now refer to
‘financial inclusion’ rather than microcredit when discussing the merits of small-
scale finance for micro-entrepreneurs. Among other things, this rebadging of the
failed microcredit model to allow its continued operation almost in secret confirms
one of the decisive insights from institutional theory that has been written about at
least since the time of Marx, and was more recently re-emphasized by the
conservative institutional theorist Douglass North (see North, 1990). This is that
‘bad’ institutions are very often allowed to survive, and may even be encouraged
to flourish, simply because it is in the interests of the powerful for this to happen.
1 The idea that Yunus was, in the 1980s, hugely over-selling microcredit as a
‘poverty panacea’, has often been robustly rejected by his supporters (for
example, see Counts, 2008: 9). In truth, among many working on poverty issues
in Bangladesh at the time, it appears to have been a quite well-known problem.
For example, internationally respected development economist, David Hulme
(2008, p. 6) has written that when in the 1980s he came across Yunus in the field
in Bangladesh, he found Yunus to be ‘energetically promot(ing) microenterprise
credit as a panacea for poverty reduction (something that intensely annoyed me,
as it was so wrong)’.
2 For example, see Dr Muhammad Yunus’ acceptance speech given on the
occasion of his receiving the Help for Self-help Prize of the Stromme Foundation,
September 26, 1997 in Olso, Norway. Reported in vol. 1 (2),
November/December, Newsletter of the Micro- credit Summit Campaign.
3 An exception here is the pioneering work of David Hulme and Paul Mosely
(Hulme and Mosely, 1996: 118–119) on the link between finance and poverty
reduction, and from which several of the important references in this section were
first brought to the attention of the author.
4 A good example would be the situation in London in the mid-nineteenth
century when millions of poor individuals were forced to survive by engaging in
petty activities and self-employment ventures. While generating the appearance of
dynamism, the proliferation of such ‘survivalist’ enterprises, in fact, also helped
to drive down wages and prices and so, ‘the casualization and competition of
labour were pushing workers in these industries into poverty’ (see Loftus, 2011:
5 Buera et al.’s (2012) macro-model is built around the central assumption that
local demand always elastically stretches to unproblematically accommodate any
amount of new entry. Exit and displacement effects are entirely absent in their
world. With such unrealistic assumptions as the point of departure, the authors go
on to develop a model of the impact of microcredit in the local economy, and they
find two interesting out- comes. First, their model quite centrally hypothesizes
that after microcredit has been introduced into a local economy, the local wage
rate will rise. This is because, they argue, poor individuals will now be able to
quite opt out of low-paying wage labour and establish a functioning
microenterprise that generates a higher income. Second, the authors go even
further to assume that many of these new microenterprises will enjoy sufficient
local demand such that they can also employ additional employees which, the
authors go on to argue, will serve to further compete local wages up to an even
higher level than before. As was perhaps the objective in adopting such wholly
unrealistic assumptions, the authors conclude that the microcredit model will
likely generate positive outcomes for the community.
6 One view on this is that the economics profession (especially in the USA)
refused to pick up on such as crucial displacement and exit effects because to do
so would prevent them from creating the uplifting picture of microcredit impact
required by those reviewing, grading, funding and supporting their work (see the
discussion in Bateman, 2013a). As McKenzie and Paffhausen (2017: 2) point out,
this form of ‘intentional ignorance’ eventually stretched to include those
celebrating and working with the supposedly more accurate randomized control
trial (RCT) methodology. The authors note that ‘Almost two-thirds of published
randomized experiments testing policy interventions for small firms in developing
countries ignore firm death completely, neither reporting the death rate nor
examining it as an outcome.’
7 Say’s Law is also often referred to as ‘the fallacy of composition’.
8 When it was realized that a successful post-war Germany was actually needed
to prevent the spread of communism across Europe, in 1947 the Morgenthau Plan
was quietly abandoned and replaced by a much more pro-active development plan
– the Marshall Plan – that successfully re-industrialized Western Europe (Reinert
In the World Bank’s (2013b) Enterprise Survey of Bangladesh, ‘access to finance’
was rated the third most important obstacle for firms after ‘political instability’
10 See ‘The Jobra of Yunus: poverty there has not found itself in an archive’,
Bhorer Kagaj, Dhaka, 10 March 2007 (the partial English translation of this
article can be found at Chowdhury 2007: 202–4).
11 Among other things, the UNDP report shows that there were more poor
people in eight of the poorest Indian states than in the 26 countries that comprise
Sub-Saharan Africa. This means that the ‘intensity’’ of the poverty experience
found in many parts of India is actually on a level with Africa. For example,
poverty in the state of Madhya Pradesh, which has a population of 70 million, is
almost identical to that found in the Democratic Republic of the Congo, the war-
affected state in Africa with a population of 62 million.
12 The Enterprise Survey of Bolivia showed that 41.7 per cent of
microenterprises and small enterprises in the sample placed the informal sector as
their most important obstacle to faster growth. The informal sector was the second
most important obstacle for medium enterprises (25.8 per cent compared to 27 per
cent for ‘political instability’). The most surprising result was that large
enterprises registered the informal sector as by far the most important obstacle to
their growth, with 59 per cent of such enterprises placing it first.
13 From personal connections the author had with a number of analysts in the
IDB, it became clear that the Pagés book had created something of a storm within
the IDB. Some senior management levels as well individuals based in the
department responsible for microcredit programmes realized, a little too late in the
day, that the book actually made a very solid case against the microcredit model
and they were none too happy about it.
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