Micro-credit may not be what it was marketed as
Prime Minister Sheikh Hasina is entirely correct when she tells us that micro-credit isn’t the universal development panacea that it was promoted as, while the fact that some gained renown by telling us that it was is also correct. The truly important part of all of this though is what the episode has taught us all. Over and above what we should already know, there is no simple solution to anything as complex as generational and mass poverty.
Of course, economic growth solves poverty but that just moves our complexity of the solution one step higher. However, there’s something vastly interesting that the varied global attempts to expand micro-credit have taught us. Something that we’d do well to introduce into whatever plans we have for the near-future.
Perhaps the first thing is that we’re never going to know until we go and try something. After all, the idea that the poor were credit-constrained made sense. And if they gained credit then they could invest and grow -- it seems to make sense. But we never know if these things make sense until we go out and try them.
This being the argument in favour of a market economy in the first place. There are many things that seem to make sense but don’t quite work out in practice. Thus, rather than a planned society foisting such ideas on everyone, we should be allowing people to do the experimentation. In that manner, we filter through all the possible ideas and thus find those few that do work. Once we’ve shown they work, then we can all copy them.
But what is the specific thing that micro-credit experimentation taught us? The poor might like a bit of credit, and they’ll benefit a bit perhaps. But what they really want is a method of micro-saving. That is, the benefit of micro-banking isn’t being able to borrow small sums of money. It’s being able to save small sums for those inevitable crises that arrive.
Think this through for a moment. The poor are, largely enough, the rural labourers, small farmers perhaps. Income is seasonal, tied to the crop cycle. So, there are times when there is some money, times when there isn’t. Saving is a way of smoothing consumption over variable earnings, as Milton Friedman told us. Therefore, the poor need a method of saving.
But, they’re poor. They don’t have much money. Therefore, it’s not worth it for traditional banking to cater to their needs. However many farm labourers you’ve got using it, you’re not going to cover the overheads of a bank branch. Which leaves them with what choices?
Paper money can be stolen, and the rats can -- often enough will -- eat it. And if the neighbours know that there’s actually money around, how difficult will it be to preserve those savings if someone asks for some help? Which is, of course, the reason why there’s so much gold jewellery out there in the hinterlands -- it can easily be sold or pawned when necessary. The family’s gold, even if it be just an earring or two, is the family’s savings account.
All of which is what led to the surprising finding about various electronic methods of banking such as M-Pesa in East Africa. Yes, having a payment system was useful and used. That it was possible to transfer money, simply, and cheaply, was indeed that boon. The various micro-credit schemes were thought to be useful. And the thing that people really stampeded to use was the ability to save -- quickly and cheaply.
Sure, small amounts all the time and often enough, for fairly short periods of time too -- months at most. But that’s what people wanted the most: A secure and cheap savings method. The proof that they valued it being the speed at which they used the new systems -- this has been true in many places -- to do exactly that.
We’d not have known any of this if the possibility hadn’t been there. So, one up for market experimentation of course. But now that we know that this is what people want, we can copy and expand the idea.
The poor want to be able to save, cheaply, safely, easily. It’s not about that pension, decades away. It’s about income smoothing over the tribulations and joys of life. So, that’s what we should probably be trying to roll out.
As to whether this makes people richer, well, that’s a question with two answers. Does it foster economic growth and make people less poor in that manner? Perhaps, a bit. But poverty is really not having very much of the things that you want. Getting richer is having more of them. If the poor desire a savings mechanism, then making one available to them makes them richer. By definition in fact, they’ve now got more of what they desire.
Micro-credit might not be all it was marketed as being. Micro-savings seems to be even better than we’d at first thought.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.