Microcredit in Third World Economies: Rural Poverty in The Less Developed Economies - Essay Example

Microcredit in Third World Economies: Rural Poverty in The Less Developed Economies Questions: 1. Is microcredit the new hype for eradicating rural poverty in Third World economies? 2. How best can the West deliver aid to mitigate rural poverty in the Less Developed Economies (LDCs)? Introduction Eradicating rural poverty in Third World countries has been like an old tune to economists and policy makers for over 50 years now. Several strategies have been suggested, tried and implemented without much success over the years. The traditional obsession with macro policies implemented at the state level has at most been disastrous. This, coupled with the inefficient delivery of aid to the poor nations, has only increased corruption, high and persistent inflation and unemployment, political repression and burdensome external and public sector debts (Woller and Wordworth 269). This paper is divided into two parts. Part one looks at the latest strategy, microcredit, floated as a possible solution to ending rural poverty in Third World countries. Microcredit embodies the specific recognition that the lack of access to credit can be a limiting factor for significant numbers of the economically active poor. The second part seeks out a way through which the West can deliver aid effectively, efficiently and accountably to help combat rural poverty. The origins of microcredit Since the end of World War II few countries have moved from underdeveloped to developed status with the exception of the Asian tiger economies. Though the reasons for this remain numerous and complex, Woller and Wordworth (268) attribute a large portion of the blame to widespread macro development policy failure. In the past it was believed that the best way to tackle poverty is through top-down, state-led development policies modeled on the experience of the Western industrial nations. These policies favored large-scale industrialization and concentration of economic power on elite groups. To make matters worse the international aid community reinforced the ills of these policies by pouring billions of dollars into numerous, and often dubious, large-scale state development projects (Woller and Wordworth 268). Worse still, from the late 1960s, a rural alternative to the state-led modernization drive called the Green Revolution was initiated. The Green Revolution essentially forced Western agricultural practices on indigenous Third World peasant farmers, with many small family plots being expropriated by central governments and leased out to huge multinationals in the Europe and America. The end result of all these policies were uneven industrialization, high and persistent inflation and unemployment, endemic corruption, political repression and burdensome external and public sector debts (Woller and Wordworth 269). In recent years economic growth has picked up creating a new sense of optimism for the Third World. However, even in a best-case scenario, it would be foolish to expect poverty eradication in these countries in the next few years. Woller and Wordworth (270) are convinced that in the absence of policies that provide economic opportunities for the poor, macro development policies will continue to bypass the poor. What the Less Developed Countries (LDCs) need are small, concrete efforts that emanate from the grass-roots. The microcredit movement is part of this new paradigm that has emerged from the underground economy of the poor. The microcredit rationale Microcredit is defined as programs that extend small loans to poor people for self-employment projects that generate income (Woller and Wordworth 267). With limited employment opportunities, in both rural and urban areas, millions of poor people in LDCs must earn their living through self-employment in the informal economy. This involves engaging in activities such as hawking, bicycle and/or rickshaw transportation, collecting scrap and running small shops. However, even these self-employment opportunities require capital for starting up, running or expansion. The informal economy is starved of financial capital (Woller and Wordworth 267) and the little income that these poor entrepreneurs make per day is mostly used to meet their daily basic needs. The informal economy of the Third World today is large, growing and likely to be permanent. The microcredit movement recognizes this and thus the underlying key role played by financial capital in raising the labor productivity of the poor within this sector (Woller and Wordworth 271). The fundamental presumptions behind this movement are that: (1) The poor possess an irrepressible desire and innate capacity to lift themselves out of poverty, if given access to economic inputs; (2) formal credit markets discriminate against the poor; (3) and microcredit allows the poor to work their way out of poverty over time and with dignity (Woller and Wordworth 271). But it is not all rosy for the microcredit movement. Many microcredit organizations have failed to live up to their promise of “including the excluded” mainly due to weak management structures. Nevertheless, it is expected that any movement - especially one that has scaled up to the extent that is evident of the microcredits – will have its successes and failures. What is important to note is that the success stories of indigenous microcredit programs far outnumber the failures. And this is replicated throughout the world’s poor from Asia to Africa to Latin America (Woller and Wordworth 272). Part 2 Aid the debate Fengler and Kharas (1) state that we live in a new reality of aid where it is a US $200 billion industry. Between 1960 and 2008, rich countries had delivered US $3.2 trillion of aid to poor countries. With such humongous amounts of money at play two very divergent schools of thought on the future of foreign aid have emanated. On one hand, there are experts who advocate for increased aid - because it works – while on the other hand there are those who argue that aid has only retarded the progress of poor nations because of lack of accountability. Another concern has been that much of the aid pays for multiple teams of foreign advisers who sometimes give contradictory advice. This implies that the aid funds end up going back to foreigners. In the past, most aid came from members of the Development Assistance Committee (DAC), a club of 22 rich countries as official development assistance (ODA) (Fengler and Kharas 2). Today, large and increasing portions of aid are coming from private institutions and corporations, as well as bilateral aid from non-DAC governments. Fengler and Kharas (2) inform us that two thirds of the growth in aid flows since the early 1990s has been coming from nontraditional sources, and a third has come from DAC members. In fact they anticipate that soon aid from non-DAC bilateral donors and private sources of funding will rival in size the traditional aid from the rich 22 countries. However, the problem is not with the aid per se but with the support structures. Today, aid needs to leverage knowledge, evaluate programs, identify successes, and then scale up. Fengler and Kharas (5) propose that a new consensus be built around the ideals of information openness and decentralization of coordination efforts so that the numerous networks of aid coordinators and aid agencies would share information around the world, driven by common standards for data management. To do this the Fengler and Kharas (7) advocate for geographically based development authorities within poor countries to focus on providing information required to run an efficient aid program and an international body of national development aid agencies to deliberate, share best practices, and provide an informal mechanism for holding aid agencies accountable to the poor people of the world. Conclusion In part one, we have seen that microcredit has the potential to speed up the migration of developing countries from Third World to the First World if used with other macro development policies. This means that microcredit is not hype but a real solution. In the second part, we have learnt how aid can be best delivered if it should support microcredit in eradicating rural poverty in the Third World. Works cited Fengler, Wolfgang, and Homi Kharas. “Delivering Aid Differently - Lessons From the Field.” Economic Premise Feb 2011: 1-8. Print. Woller, Gary M, and Warner Wordworth. “Microcredit as a Grass-roots Policy for International Development.” Policy Studies Journal 29.2 (2001): 267-282. Print.  Read More