The Microfinance Debate at McGill

So in between academics and getting my life in order I also involve myself in some of the clubs that interest me here at McGill. The student body is very active and discourses are often intellectual or inane, depending on context. (Topics range from changing the world, gender inequality etc etc to well why the Toronto Maple Leaf is suddenly on a hot streak, killing the Pittsburgh Penguins 4-3 yesterday night).

Anyway I have also successfully obtained a position as a contributor to Student Network for Economic Development so the goal is to turn in an article on microfinance every week.

Being the contributor can be a very humbling position because quite often you have to be prepared to answer question and engage in discussions. Sometimes I correspond on behalf of the club with the school’s paper and well basically anyone who is interested in anything about Microfinance. This is the interview with SNED and my response on behalf of it.

Do you think that Microfinance, due to its effectiveness, has diminished the credibility of the World Bank and IMF?
Yes, if you look at the resources that the World Bank and IMF have poured into tackling the issue of poverty the results are dismal and even counter-effective at times. What the World Bank and IMF didn’t understand was that there is no one-size-fit-all policies when it comes to tackling something as tacky as poverty. Glocalisation would be a more effective way of approaching it. Microfinance is not always successful in all parts of the world, and a good example that comes to mind is India(government mandated loan requirement forces Microfinance Institutions to be reckless in handing out loan and not informing borrowers that these are loans and not handouts). What we have to understand is that any approach in microfinance has to be tailored to the varying needs of different communities. So in terms of incorporating such understanding in their business models, MFIs (Microfinance Institutions) are successful and hence the perceived diminished credibility of the World Bank and the IMF.

Do you think that Professor Yunus, whose area of expertise is in Banking, is going in over his head by now endeavouring to change the health of Bangladeshi Citizens? Shouldnt that be the government of Bangladeshes job?

No, Grameen Bank is a social enterprise that has a different objective compared to other types of firms in the market. A social enterprise is utility-maximising rather than profit-maximising,so the priorities of social enterprises are to maximise community welfare with market-based solutions, rather than to be solely driven by profit and shareholder value per se. You can see a social enterprise as an entity that bridges the efficiency of businesses with the soul of humanity. While governments are mandated by its citizens to implement policies to look after the well-being of society, they are notorious for enacting costly, sinkhole projects in spite of the noble intentions behind such initiatives. What makes it more difficult for any government to function is the scarcity in resources that it has to grapple with, particularly in terms of funding. Fiscal austerity is a perennial concern for foreign investors, or government treasury bond holders; in a similiar vein the issues of taxation, transparency in government also cripples governments in a way. Professor Yunus’s initiative is desirable in a way in that it steps up to the expectations that the government failed to meet. If Grameen is able to come up with social-business models that can cater to the health needs of Bangladeshi citizens then it would be a gain to the economy (sinkhole projects are a deadweight loss). Social-enterprises can have a comparative advantage in certain projects (as results in microcredit can attest), and it certainly is better for governments to allow social enterprises to replace them in areas where these social enterprises have a comparative advantage in.What this differs from say,privatising social welfare programmes is that social enterprises still take into account social welfare rather than to be profit driven. So it is one thing to look at privatisation of public goods in askance, but there is a distinction between social enterprises and firms that seek to maximise only profit. In fact I would go as far as saying that part of the government’s major objective is to allow an efficient distribution of resources, so having social enterprises replacing them in certain roles in the economy is their job. This is why I don’t think Professor Yunus is overeaching in terms of trying to work on this healthcare project

Will social business deter FDI within a country because it will make it appear greedy if they are working for – profit? Is that such a bad thing?
There are no empirical data that I have seen that links FDI flows with the fear of appearing to be greedy, so what I have to offer is plausible conjectures but is nonetheless backed up by my observation (though I ought to remind you that I might have an observer bias in this). What is plausible is that it will probably not have that huge an impact on FDI flows on two grounds. First,at the short and medium run at least, FDI’s generally flow to regions that act as manufacturing hubs rather than consumption hubs. So regions that offer cheaper materials and labour are attracting FDIs because they are cheaper to operate and not because they have a potential market that can be tapped into.As in the case of China, it might be the second biggest economy in the world but it is still dependent on exports and the market of potential consumers is not the number of its population, but is estimated to be in the region of 300 million,roughly the size of the population in the USA. So even if they are profit-driven, workers in impoverished regions offering cheap labour to attract FDI will not stop working on accounts that the companies they are working for is profit-driven or greedy, simply because the need for wages is higher.Consumers who are also workers in this region then will exert little pressure on the foreign firms investing in the country, so this is where there is minimal impact on FDI flows. Secondly, under the pressure from “ethical shareholders” and consumer activism, firms seem to be altering their behaviour when it comes to operating their business. While they remain committed to shareholder value and profitability, we are seeing firms who are incorporating some degree of community welfare in their business. (Think of Starbuck’s fair-trade policy, environmental-friendly commitment. These are ways to promote themselves as green companies for sure, but at least such marketing efforts is good for the communities that they operate in).

An altered behaviour of firms is not a substitute for social enterprises to be sure. But in their difference in goals, social enterprises are offering consumers around the world to compare the behaviour of social enterprises and the mainstream profit driven enterprises. This gives purely profit-driven firms pressure to put on their best behaviour. So overall I think social business do not affect FDI’s flow, but it does provide consumers around the globe to compare the behaviour of social businesses and purely-profit businesses, which in turn altered the behaviour of profit-driven firms to take into account any externalities they impose on the community, and ways to enrich the community that they operate in. So the impact is not only minimal, it also brings about a good change.

After this, the Daily’s contributor wrote an article about microfinance and the social changes it has brought.
Of course, not everybody agreed. A graduate student with the pseudonym Ted Sprague disagreed and instead assailed microcredit as a tool in exploiting and enslaving the poor. In it he is also critical of the capitalistic system as a whole and his arguments, while well-intended does strike me as being too dogmatic and not objective enough.
(Note: I consider myself centre-left leaning, so don’t get me wrong and think that I am here espousing market-fundamental values, I subject my view to skepticism too and that is why I limit whatever I present).

My commentary will be published on Monday’s issue and I will then post a link to this post.

Update: The commentary I mentioned about can be accessed here.


2 Responses to The Microfinance Debate at McGill

  1. fievel says:

    Interesting stuff on econs. I'm not a fan of the subject but the style of writing and "canadian humour" sprinkled with loads of definitions are appealing.

  2. GoatKY says:

    Thank you for your kind words, I am happy that you like it. I write this blog in part to make the insights and controversies of economics accessible, especially when so much of our public policy is shaped by the field.

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