The Poor: Great Minds, Great Innovation, Sh***y Banks

Generally, the poor tend to pay higher interest rates than the rich when taking out a loan.  In India, a fruit seller who has taken out a loan to support her business must pay 4.69% interest a day.  “If you borrowed 100 rupees today and kept it until tomorrow, you would need to repay 104.69 rupees.” Because of these high interest rates, the founders of microfinance institutions “were called to action”.  The poor do not receive loans from “a proper lending institution like a commercial bank or a cooperative”. Instead, they borrow from moneylenders, relatives, shopkeepers etc. The interest rates and the lack of oversight of the loan, i.e. extortion, not paying the loan back, etc. has caused the rise of Microfinance Institutions (MFIs) in “poor” countries.

A famous Microfinance Institution, the Grameen Bank, founded by Nobel laureate Mohammed Yunus, “has reached anywhere between 150 million and 200 million borrowers, mainly women.” The accountability of a loan is communal. The loans are normally given to groups, so each person is “liable to each others’ loans and hence have a reason to try to make sure that the others pay.”  The MFI’s also use the “powers of shame”. They use “connections within village social networks to put pressure on recalcitrant borrowers.” This method is effective and does not cause physical harm. However, most other non MFI lenders tend to come after borrowers aggressively.

When one thinks of the MFI and the recent economic crisis that the world has experienced one must question how economic crises effects interest rates, borrower rates, the rates of paying back the loan and the businesses that are being supported by the loans.

As financial markets struggle internationally, some microfinance institutions have begun to see downstream effects in the form of rising lending rates. As financial markets struggle internationally, some microfinance institutions have begun to see downstream effects in the form of rising lending rates.

Interestingly in times of financial crises the MFI’s have been steady and stable.  According to Benjamin Kahn “there is little doubt that MFIs will benefit from close ties with their local communities, from knowing their borrowers well, from having an ownership structure that includes shareholders with a strong interest in their well-being, from conforming to local financial regulations and from making good use of local savings.”

Being involved in the community level is advantageous, the Institution is familiar with the community on a personal level and thus it is easier and more profitable and less risky for both the institution and borrower. But one must not ignore unexpected external and internal events that could drastically alter the stability of microfinance and could possibly worsen the situation of the borrowers who strive to improve their lives.

The Reality of Poverty in America

“Tis not enough to help the feeble up, but to support him after.”
-William Shakespeare

The divide in American mentality of deserving poor vs. undeserving poor has not changed. There are lawmakers who are still classifying the poor into the two groups. In the 1990’s under welfare reform was passed in a Republican dominated House of Representatives under President Clinton. The Bill was called The Personal Responsibility and Work Opportunity Act. The Bill had provisions as to how welfare assistance was to be distributed. There were conservatives and still are conservatives who blame the poor for being and blame the welfare system for enabling the poor for sustaining their poverty.

The PRWOA provided incentives for finding work. One’s welfare will stop after two years, and within the two years one must find a job. The Act did not provide companies or employers, direct incentives for hiring people. When the government cuts aid it must provide an opportunity for those affected to find replacement relief in the market.

Martin Luther King Jr. advocated for the poor in America, including poor whites. He said “There is a problem of underemployment, and there are thousands and thousands, I would say millions of people in the Negro community who are poverty-stricken – not because they are not working, but because they receive wages so low that they cannot begin to function in the main stream of the economic life of our nation.” In Barbara Ehrenreich’s “Nickel and Dimed” she argued that one cannot survive off of a minimum wage paying job in America. In her book she tried to live off of minimum wage and found that she had to find more than one job. She not only worked appalling hours, but she still could barely survive and found it difficult juggling her two jobs. The book concluded that most low-paying jobs in America are part time, require full-time hours, do not offer benefits such as insurance and social security and are not adequate in providing for one person let alone a family.

The definition of poverty must be politically feasible. However, the definition that policy makers are using does not properly address the problem itself. It seems that there is a grand political divide and this political divide caters to party politics rather than creating substantive solutions to the problems that Americans are facing, especially in light of the recent recession. There were Congressman, at the beginning of the recession, placing the onus on the unemployed, saying the unemployed are trying to exploit the system and are not willing to find work because the government is providing for them.

The divide in mentality towards the poor, in America, of placing the onus on the poor, has not changed. There are still constrained labor markets which makes it difficult for the poor to achieve upward mobility. The economic divide between the poor and rich in America is growing which makes it difficult for people to break the cycle of poverty especially with aid constraints put on them without viable job opportunities being made available creates a cycle of ineffective definitions of poverty thus ineffective policy. Ineffective policy may lead one to evaluate, perhaps one is better on the welfare system than having a minimum wage paying job.
It’s important that when policy is implemented programs evaluate the permanence of taking one off welfare rather than create a demoralizing ineffective cycle.

Uganda

“We can successfully address poverty, perhaps in a limited way, even in bad institutional environments, by focusing on concrete, measurable programs; and making people richer and more educated can start a virtuous circle where good institutions will emerge”

The government of Uganda gives money to specifically address infrastructural problems the schools may have, i.e. building maintenance, text books, programs, etc. In 1996, two people, Reinikka and Svensson, wanted to know how much of the government funds “ actually made it to the schools?” The percentage of the amount sent and the amount that made it to the schools was 13%. “More than half the schools got nothing at all.”
After the study was published, in 2001, schools in Uganda were getting “80 percent of the discretionary money that they were entitled to.” It was easier for the district officials to divert the funds into their own pockets when no one noticed or was watching.

Jeffrey Sachs, the founder of the Earth Institute at Columbia University, “sees corruption as a poverty trap: Poverty causes corruption and corruption causes poverty.” In an article written in 2005, Sachs suggests that two ways to tackle corruption in a government are : the protection of civil liberties and transparency.
There are international organizations that evaluate the transparency of a country, for example: Transparency International. The responsibility of Transparency International is to produce an annual ranking of “corruption perceptions” by measuring the public’s view of the extent of corruption in a country.” According to Transparency International the country with the least corruption is Iceland and the country with the most are Chad and Bangladesh, both tied, respectively.
The second point Jeffrey Sachs mentions is the protection of civil liberties. Poor countries have less corruption when its citizens have civil liberties, such as the freedom of speech, press, right to assemble, etc. He believes that “society benefits not only by increasing the range of ideas that are debated, but also by keeping corruption in check.”

By having more transparency and civil liberties in a poor country, it will implement accountability because legal rights will be strengthened through the exercise of one’s civil liberties. Thus, economic development will be consistent and reliable. If a country has a growing economy, accountability and civil rights “political despotism and corruption will be brought under control “

http://www.project-syndicate.org/commentary/sachs106/English