The Foreign Service Journal, June 2021

44 JUNE 2021 | THE FOREIGN SERVICE JOURNAL less forms a sustainable basis for economic development, or that “financial inclusion” (the term used today to encompass micro- finance services) is even a real need. Microfinance practitioners have largely ignored such findings, beginning with the conclu- sions of a 2009 randomized controlled trial in Hyderabad’s slums conducted by MIT’s Poverty Action Lab. Blinkered by their narrow focus on getting financial services to the poor, microfinance organizations, especially the nonprofits, see only the short-term effects: a roadside seller whose daily profit grows from $1.00 a day to $1.45, a woman who can now put a sheet of corrugated iron on her hut’s roof, etc. They blot out the all-important contexts in which their clients live—contexts that are layered with complexi- ties that, especially in the poorest parts of the world, account for barriers that microloan programs can do little to surmount. Yet a rigorous examination of the context for microfinance and the poor it seeks to reach is exactly what should have been done from the beginning. A review of just some of the contextual issues offers a cautionary tale of how important (and challeng- ing) it is to understand them. 1. Position counts more than condition —the sociocultural context of poverty. Most microloan recipients in the poorest countries are subsis- tence farmers or petty traders selling out of a small space on the ground or from a rickety table on a roadside or in the ubiquitous markets of sub-Saharan Africa, parts of South and Southeast Asia and some parts of Latin America. These largely informal sector “jobs” constitute the bulk of economic activity for most people in those countries. A woman selling spices by the 10-gram packet or razor blades by the unit sits in a row of others with similar goods. She takes a microloan of $20 and, in theory, buys more product, thus increasing her inventory and potentially raising her profit. But studies by economic anthropologists, sociologists and field workers like myself (since the 1980s, I have evaluated scores of such programs) reveal that having more inventory in a low-margin economy actually increases risk by reducing the flexibility to shift to other products or other locations as demand changes. In the best-case scenario—let’s say that the spice seller has great natural selling skills—she does manage to raise her net income, say from $1.50 per day to $2.35. This is a meaningful increase for her, but it is not enough to move her out of poverty. Instead of being very poor, she is now merely poor; she can add a piece of corrugated roofing to her shack, but because of her lack of resilience her improved status may be temporary. In short, her condition has changed in the short run, but her position in society has not; she is not on the ladder to economic growth. This important distinction between condition and posi- tion is largely ignored in the microfinance community. For, as we’re now relearning about “structural racism” in the United States, it is people’s position in society (determined by complex historical, sociocultural factors and, often, hidden arrangements in the political economy) that counts, not immediate or short- term changes in their “condition.” Such contextual complexities are specific to each country or region. They include but are not limited to: local and national history, custom, law, beliefs; the particulars of location, trans- portation and communications infrastructure; land tenure and labor arrangements; the differing economizing strategies of a variety of social units such as the household, clan or tribe; how political controls are exerted; the durability of social capital; eth- nic, religious and class competition; the ways in which kinship bonds often underlie economic activities; and the possibility in many developing societies that the economic return of an activ- ity (production, trading) is only one of many goals. Not least among the contextual variables is the level of eco- nomic development, including the degree to which governance, legal and financial regimes and the rule of law are developed. If these institutions are “underdeveloped,” there is less stability, less equality of opportunity and more corruption, and people have less trust in government. In short, in many of the developing country environments where microfinance has been applied, its potential as a poverty solution is severely diminished. Those who are supposed to ben- efit end up, at best, “all dressed up with no place to go.” 2. Human nature—money is fungible. A founding assumption of microfinance was that loans would be invested in a business. In fact, much of microcredit instead goes to “consumption smoothing,” softening the peaks and val- leys of the cash-flow graph so it looks more like a ripple than a roller coaster. Such smoothing makes it easier to get over a cash crunch or to enable the purchase of medicine or the financing It is a mistake to assume that before aid efforts came along, the poor had not already figured out how things work in their world and how to optimize that knowledge.