Policy-Making at the International Level : Troublesome Justifications

You would expect international experts on development, economic assistance and finance to be careful as to the type of programs they sponsored and to try to make their investments as efficient as possible, be it in terms of financial or social returns. But international financial institutions appear to draw their motivation from other factors.

Blind Support?

As microfinance moves away from an NGO-type of activity to a business-type of sector, the World Bank and affiliated institutions increase their support to the program. While there is nothing intrinsically wrong with this, the justification they give for doing so is that microfinance is effective tool for poverty reduction, and that is rather troublesome.

And so are some of the propagandistic statements made by those institutions. Indeed, their blind embrace of microfinance as the cure to all ills and their statements lacking references show little professionalism. Here’s a sample for your delight:

CGAP:

“(…) microfinance empowers poor people to diversify their income sources, meet basic needs and cope with shocks to their income. (…) By reducing vulnerability and increasing earnings and savings, financial services allow poor households to make the transformation from every-day survival to planning for the future. Households are able to send more children to school for longer periods and to make greater investments in their children's education. Increased earnings can lead to better nutrition and better living conditions.”

http://www.cgap.org/p/site/c/template.rc/1.26.1305/

United Nations:

“Currently microentrepreneurs use loans as small as $100 to grow thriving business and, in turn, provide their families, leading to strong and flourishing local economies. (…) Women have become more assertive and confident. Furthermore, as a result of microfinance, women own assets, including land and housing, play a stronger role in decision-making, and take on leadership roles in their communities.”

http://www.yearofmicrocredit.org/

While I am myself a firm believer in the potential of microfinance to incur change, I believe that more needs to be done to measure its impacts before coming to any conclusion. The expected - and logical - path of action for international financial institutions would be to assess the impacts of microfinance and scale it up only after positive results have been found. However, they seem to be taking the reverse approach, in which massive funding and project scaling precedes evaluation.

Another widely discussed facet of this issue is the fungibility of money - some projects with more potential might not be happening because funding has been redirected towards microfinance. The numbers can appear rather trivial at the regional level, but overall, the World Bank spends more than a billion every year on microfinance through its International Development Agency (IDA) and International Financial Corporation (IFC), with microfinance representing almost 2% of IDA lending.


Justifications

But why the wave, why are international financial institutions giving full support to microfinance? One of the main reasons is that the World Bank and the IMF have, since the early 2000s, promoted the addition of ‘poverty reduction’ components to their policies, and microfinance is one of those policies. As a matter of fact, the World Bank has imposed the adoption of a “Poverty Reduction Strategy Paper” (PRSP) as a condition for a country to receive a loan or debt forgiveness.

Whether that can really be considered to be an innovation is debatable. Raul Prebisch’s 1979 cynical statement still has relevance today:

“Another idea has now appeared which fires the enthusiasm of some Northern economists, that of eradicating poverty – a phenomenon which, apparently, they have just discovered. Who could refuse to fight against poverty? But is this possible outside the context of development and enlightened international cooperation policy?”

While India and China refuse to write PRSPs for the World Bank, arguing that they already have national poverty reduction plans and that PRSPs would be quasi useless, most countries now have to conform to the World Bank’s policy regarding poverty reduction. The rationale behind this is controversial, but I will discuss it in another blog post.

Overall, the efforts that went towards promoting microfinance by multilateral organizations might be due to its real poverty reduction power. But they might also have been done for window-dressing purposes. Let’s hope that, if the latter is the reason, the former is also true. I suppose that this is in big part what the role of CMF and other research institutes is : to assess whether policy decisions, be they at the local, national or international level, can be justified and should be carried on.