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Thursday, November 4, 2010

Micro-lending Falls on Hard Times

Do I have a grudge against the Nobel Prize committees? A few weeks ago I launched a broadside against the awarding of prizes to three - no doubt well meaning and diligent - academic economists whose work on unemployment was postured as earthshaking contributions to resolving the current crisis. At the same time, I took a pot shot at last year’s Nobel Peace Prize going to the serving US President, an award that likely caused him some embarrassment after his dramatic escalation of the war in Afghanistan. And I couldn’t help noticing that my colleagues at Marxism-Leninism Today posted an article by Stephen Gowans that loosed his acerbic, sharp pen to blast this year’s Nobel Peace award granted to Liu Xiaobo. Gowans’s considerable talents conclusively demonstrate the stealth political agenda behind the committee’s decision. One is staggered by an international award earned by the recipient’s singular achievement of soliciting and attracting a mere 10,000 on-line signatures on a petition that, in effect, calls for the overthrow of the Chinese government.

But let me be clear about this: my quarrel is not with the recipients, at least not in past polemics. Rather, it is with committees that posture as unbiased and speak with the conceit of service to mankind. Instead, it is more and more obvious that the awards serve the ends of Western elites and legitimize their view of the world.

Take, for example, the 2006 Peace prize awarded to Prof. Mohammed Yunus for his pioneering work on what came to be called “micro-lending”. No doubt micro-lending – the idea that tiny loans to impoverished people could or would raise people from poverty – might, in some cases, be effective. Undoubtedly a small loan to a budding entrepreneur could launch a new, successful career in one of the world’s many economically barren areas. Of course informal loans in these areas are already a fact of ordinary life. Some are generously granted by family or friends, some are extended by usurious loan sharks. In any case, while granting that some could be lifted out of poverty with a modest loan, a financial helping hand, only the witless or perhaps a capitalist sensing potential profit would pose micro-lending as a solution to world poverty. Generously, I doubt that even Yunus ever saw the practice as the solution to mass poverty.

Nonetheless, the media, a gaggle of liberals, and many pundits hailed micro-lending as a miraculous answer to grinding poverty. In a striking display of ostentatious compassion, celebrities tossed money at the micro-lenders, puffing with pride over their genuine sympathy for the downtrodden. As the word got around about micro-lending, a groundswell of enthusiasm and a basket of awards and prizes followed, culminating in the Nobel Prize. Even Bill Clinton, the Terminator of the US welfare program, hailed micro-lending as one of the truly great poverty-reducing instruments.

As the micro-lending mania flourished, I thought that this too would pass. Like so many faddish schemes of the past, I saw micro-lending as one more fashionable way to turn liberal eyes away from the true causes of poverty in the developing world. Instead of dealing with the legacy of colonialism and the continuing pillage of imperialism, micro-leading gives comfortable people in the West a guilt-cleanser, a measure of smug acknowledgement – like the once popular “CARE” packages – that poverty was being whipped. It is certainly less costly than repaying the teeming masses for centuries of exploitation, brutal domination, and neglect. And I was well aware of the argument that a mere $200 micro-loan could help a poor villager establish a bicycle shop. But I wondered how the other villagers could rise from poverty by also setting up bicycle shops.

But lurking in all the palaver over micro-loans was the interesting micro-fact: lenders generally charged between 25 to 100% annual interest. Now I don’t know what village loan sharks charge, but my imagination stretches to envision their pushing much beyond these bounds. Granted, their collection methods might be considerably more severe than the beneficent micro-lender. To my mind, the micro-lending mania produced the aura of the pay-day loan shops that prey upon the working poor in the US.

But the micro-lending phenomena proved to be more than a passing fad. Today in India, one of the largest “markets” for micro-loans, there are more than 25 million borrowers and loans total well over 200 billion rupees. Total loans have grown nearly six times in three years. Banks and private equity firms have plowed over $4 billion this year into what has become a significant industry. The largest micro-lending firm recently offered $350 million in shares on the Indian stock market, according to The Wall Street Journal (10-29-10). Capitalism has discovered micro-lending.

Whatever noble intentions may have spurred the micro-lending movement, it was quickly stripped of any such sentiments when the financiers discovered it. Like efforts in the US to encourage low-income home ownership, the financial predators saw only profit. And they leaped at it, pushing the limits as far as the last dollar (or rupee) of profits could be squeezed out. The parallel between this exploitation of the most vulnerable in India and our own tragic exploitation of the poor through sub-prime mortgages is glaringly apparent.

It took a rash of suicides by borrowers to bring these abuses to the attention of Indian government regulators. The headlines in The Wall Street Journal tell it all: India’s Major Crisis in Microlending: Loans Involving Tiny Amounts of Money Were a Good Idea, but the Explosion of Interest Backfires (10-29-10), Backlash in Microlending (10-30-10). All debt payments have been suspended by the authorities and loan agents have been arrested in the Indian state burdened with 30% of the country’s micro-loans, leading WSJ writers to conclude that “the microlending movement… has in recent weeks fallen into chaos.” Once again financial predations result in chaos and crisis, a pattern that only escapes those willfully blind or cornered by self-interest.

The naked truth is that lending, like insuring, is a socially useful function if and only if it is democratically administered and publicly sustained. There is no rational or moral justification for engaging private interests. A disinterested public administrator armed with default data, an available loan fund, and a reasonable sense of social priorities and judgment of character could dispense loans untainted by the distraction of profits. Profits only distort the rationality or efficiency of this necessary social function.

The same could be said of insurance. Armed with actuarial tables (usually assembled from data collected from government agencies), a schedule of costs and benefits can be constructed by a competent statistician. It is an easy step to fairly and equitably distributing these costs and benefits in the most efficient and democratic way. Again there is no justification for introducing private gain into this process. It’s only an invitation to chaos and crisis.

It’s time to drive the money lenders from the temple.

Zoltan Zigedy

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