Micro Credit, Macro Debt: The Industry of Poverty

Posted on | oktober 1, 2012 | No Comments

Introduction

The Industry of Poverty has many faces, as it manifests itself in every society on this globe, its effects are similarly devastating for the poor. What constitutes poverty? When is a person considered poor or low income? Is a person poor when he/she has to live off of less than one (1) USD a day? Is a person poor when she/he has only one meal per day? Is a person poor when she/he has no access to the internet, social media, newspapers and an occasional holiday? Or is a person poor because he cannot afford designer clothes?

Theory I: Poverty is in my opinion a state of being determined by objective criteria, more specific the Maslow Pyramid: food, shelter are among others, considered the most vital elements of survival. Higher up in the Maslow pyramid, the needs of the individual are apparently less physiological, more psychological and sociological, in other words less objectifiable, more part of the subjective, the self.

How does one achieve ones goals? What is self-efficacy and what does it attenuate to? Is it self-respect or the respect of others? What is confidence? Is it the precursor for leadership, aspiration and ambition? And what happens if a person lacks respect, confidence and self-efficacy? Is that person considered a poor person as well? Theory II: Poverty thus is also a state of being that is determined by subjective criteria’ in other words poverty is in the eye of the (subjective) beholder.

The two theories are positioned as antimonies, thesis and anti-thesis, in an attempt to demonstrate that poverty is a universalistic conception, determined by local circumstances. The idea is also that by positioning poverty in a thetical-antithetical model, it becomes easier to build an empirical framework to demonstrate that poverty is oftentimes perpetuated because certain businesses profit from the poor and poverty. The thetical-antithetical goes against the Maslow Hierarchy of Needs theory, based on the argumentation that apart from the most basic of needs, needs are not hierarchically ordered. Instead this theory argues that needs are randomly ordered variables,not tied to certain geographical spaces and places, but determined by the individuals needs, wants and socio-economic status in a given society. Of course certain needs are not recognized as important by certain societies, which is presumably why the Maslow theory became outdated. The importance of Maslow’s hierarchy is its physiological premise, in other words, the functioning of humans as living systems, the primary driving force is the considered the basis of human need. The idea that the struggle for live is present in all human beings negates the notion that poverty is the problem of the individual, that the solution to ending is poverty hinges on the individual itself. This blog discusses so called programs and plans to eradicate poverty at micro level, thus from the perspective of the individual and macro level, from the perspective of the state. The majority of these plans are based on the notion that hard work and diligence will end poverty.

Micro-financing in Poor and Rich Countries

Micro-credit programs are excellent exemplifications of what I call the industry of poverty. Micro credit programs are so called small size loans, granted to people with no collateral to back-up the loan. The loan is granted to help poor finance their small businesses, typically home-based enterprises. Micro-finance is typically designed to empower people, in most instances women, in the developing world. Striking feature of micro credits is that it in fact finances and encourages the informal economy, and that it does not incentivize these small scale business to go beyond the informal, to improve and innovate and grow into a full-scale industry that provides work for other people. Micro credits do not come cheap, steep interest rates up to 50% are the norm, and lenders are typically required to become members of a so called “co-operative’ to become eligible for a loan. Being part of the so called co-operation allows lenders to control the borrowers, to ensure repayment. Let me put it boldly, micro-financing will not eradicate poverty, on the contrary; micro-finance only makes it easy for women to continue working from the home, keep the roof over their head and pay school fees for their children. Micro-credit makes life easier, makes it easier to take living beyond the level of subsisting.

Micro-finance will not push the informal economic sector out of obscurity,or help to formalize the informal economy and set the groundwork for sustainable development. Micro financing in fact sustains the structural character of that what poverty factually attenuates to, which is lack of disposition of capital. Feiner & Barker (2006) correctly observe that micro credits do not help elevate poverty, they merely help ease some of its aberrations.

In the western world, micro financing comes in a gamut short term and small loan schemes, ranging from pay -day loans and the pawing of possessions to high APR credit cards. Comparable to micro credit in the developing world are the pay-day loans; small short term, high interest loans with ones pay check as collateral. Borrowers are typically low income workers that become chronic borrowers as the interest rate and repayments accrues and income as a result declines. Pay -day borrowers end up in deep trouble, specifically in cases were the total income is used to pay of a loan. In 2003, Tom Lehman defiantly cautioned government not to intervene in the market, by implementing socialism, because it was not “chronic borrowers that we should fear but chronic government coercion that present the greatest threat to economic efficiency, private property and individual liberty……..A more recent article in the Guardian writes about the effects of pay-day lending schemes on people, the wantonness of spending, consumerism, responsibility and the lack of regulation by the British government. What are the long-term effects of these types of financial products on society? Who will pay for the devastation on the individual and on society? What will happen if the individuals cannot repay the loans and finds him/herself on the street? Will society pay the costs of this devastation? Will the person than pawn off all his possessions only to keep on making ends meet? The answer to all these questions is that in recent years, the obscurity of poverty and its aberrations, led to world economic crises, because who knew that poor people were used as cash cows by the banking industry? The problem is that chronic debt burdens society, it fosters greed and economic stagnation.

The Changing World Order: Changing Ideas on Aid and Assistance?

Poverty as an intellectual conception is very hard to qualify. John Kenneth Galbraith tried to define and qualify poverty but ended arguing that the phenomenon of poverty should be approached holistically. Like other scholars after him, Galbraith connected poverty with underdevelopment and latitude, the Southern hemisphere where almost all poor countries were located, were the hardest hit by poverty and economic stagnation. The rise of the Asian tigers as emerging economies in the 1980s, and, consecutive, the rise of India, China and Brasil as economic powers in the late 1990s have yet to transform intellectual notions on this new global reality. One would presume that the changing world order would usher in a shift in the academic and bureaucratic approach of poverty and underdevelopment.

The challenges that come with change and transformation reverberate in the way aid and assistance is provided. Aid is no longer the summation of East-West dichotomies, no longer is ideology the determining factor for aid and assistance. The problem is that aid and assistance programs do not work, they still fail to elevate poverty and /or generate economic take off. The question is, is do underdeveloped nations actually need assisting and aid? Aid typically comes packed as highly paid technical expertise, brought in by the donating country. Experts from the west fly in to tell the locals how they should run things, and than they fly off again. In Suriname for example, the bureaucracy that oversaw the projects and administered the funding cost more than the myriad of projects proposed between 1960-1980 (Adama 2006). The records demonstrate furthermore that between 1975 and 1980 the only funding approved by the Dutch government was for traveling, negotiating and payment for technical expertise. During that same period not one project proposal became approved and the projects completed were suffering major set-backs! The expectation that Suriname would serve as a petri dish for development is not only thwarted by reality but also by the archives that are littered with plans and ideas that never came to fruition. Neighboring Guyana is another example of a society that was given boatloads of money to fight a proxy Cold War. But president Burnham strategically played the USA and Russia against each other, preaching socialism while appeasing the Americans to get large quantities of aid and assistance to stay in office as a dictator. The same can be argued about president Mobutu of former Zaire, a man who could remain in power because of the aid and assistance from France, Belgium and the USA. There are many more dictators in the Southern hemisphere that during the 1970s and 1980s stayed in power financed by either the USA or the Soviet Union. Many scholars argued that the Cold War impeded South-South solidarity and fostered imperialism and expansive behavior of both super powers.

Today the experiences teach that shifting of wealth from the western world to Asia and Latin America did not increase South-South solidarity, on the contrary. For example, China is not interested in eradicating poverty of the lesser developed nations, China is only interested in gaining control over natural resources and minerals to advance its own domestic economy. China currently has all the hallmarks of a predator hegemon, self-serving and expansionary, and not geared to proliferate its wealth and knowledge to other societies to in the wording of Robert Gilpin achieve an efficient economy of scale. Indeed the problem of every hegemon is the spread of industrialization, a problem that is closely connected with protectionism at domestic level and the functioning of the international economic order.

Today many western development organizations typically operate at grass roots level; assistance today consists of small scale aid and assistance, such as building houses after disaster, running orphanages, subsidizing NGO’s and support informal sectors of the economy. These activities too are part of industry of poverty, creating a situation of dependency. Again in these cases the sustenance of the informal economy too is cause for concern, because it does not contribute to the eradication of poverty. Problematic is also that foreign aid dispels failure of the state to take care of its citizens, to design a program for poverty, housing and gender policy.

Conclusion

The Industry of poverty is an expansive and prolific phenomenon, that takes on different shapes and formats according to the society. In western societies, pay day loans, high interest and prepaid credit cards, and collection agencies keep poor people in their state of poverty. The industry of poverty in the western world floats on cut-throat interest rates charged to low income people struggling to make ends meet. In the developing world, poor people with no collateral are confronted with the same high interest rates, as they take on a small loan to keep their home-based businesses afloat. The difference between both categories is the latitude, and perhaps preferences of certain goods. Both categories want a better life, roof over their head, food on the table and a steady job.

The aspect of latitude corroborates that poverty indeed should be intellectually objectified, based on the argument of universality, all humans need the same elements to function and stay alive. The subjectivity of poverty is grounded on the forces that drive the individual to take its needs beyond the basics, to work, study and aspire a career as a singer, to become middle class or become a millionaire. The drive to escape poverty is intrinsically humane and humanistic, present in every society.

The rich-poor divide plays out more clearly at macro or state level. Latitude determines the face of the international world order. Western societies have always dictated the terms and conditions of development, sponsoring regimes to strengthened either the western or eastern block during the Cold War. The purpose of aid and assistance was to either contain or spread either capitalism or communism. The reality is that said proxy war did not bring prosperity to the developing world, on the contrary! There is in my opinion no need to for development aid and assistance, specifically in the cases that local expertise and experts will be cast aside, or if it means that receiving countries are required to adopt foreign modus operandi to get funding. Supported by extensive empirical evidence I want to conclude that development aid in its current format does not work and that it only kept an extensive industry of poverty intact that fostered more dependency instead.

AUTHOR: Natascha Adama
URL: http://natascha23.blogspot.com
E-MAIL: nataliapestova23 [@] yahoo.com