The Foreign Service Journal, June 2021

THE FOREIGN SERVICE JOURNAL | JUNE 2021 45 of a wedding. While this is of value to a poor person, in business terms it does not generate the money to pay back the loan. Yet many microfinance programs report repayment rates greater than 90 percent, something any big bank would die for. What we don’t see as clearly is whether such rates are sustain- able; nor do we see the myriad ways borrowers use to repay (including borrowing from another microfinance program). Moreover, as loan size grows, it is more likely that payments will be delayed, or loans will not be repaid at all. 3. The poor of the developing world already have complex financial systems of their own. Since the 1950s, when Sol Tax did fieldwork in the markets of northwestern Guatemala and coined the phrase “penny capitalism,” anthropologists and others have studied markets all over the world. They strongly suggest, first, that 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. In reality, poor people in agrarian and bazaar economies have long understood risk, resilience, credit, debt and savings— despite not being “financially literate” from our standpoint. Most important, in their terms, they may not want or need our interventions. The international development community that backs much of the financial inclusion agenda makes a simple zero-sum calculation: If you are not formally included, you are excluded. But the literature shows that a significant portion of the poor already are included in financial services that take many forms, albeit not formal modern ones. Traditional societies have always had forms of savings—in land, livestock, jewelry, even cloth. And the poor in many societies have always had ways of acquiring lump sums of cash. Informally organized ROSCAS (rotating savings and credit asso- ciations)—called “susu” or “round robins” in parts of Africa, or “arisans” in Indonesia—are common throughout the world. As for small business loans, trade credit (aka supplier credit) is also common. For example, say a trader buys samosas to sell along with her tea. She’ll get 30 samosas or so at a reduced per-item rate and not have to pay until later in the day when her tea business is over. But the most common source of business start-up capital is friends and family. In fact, most of the storied entrepreneurial successes in the United States (fromWalt Dis- ney to Subway and Amazon) began with loans from friends and family, not from banks. To emphasize the point that “unbanked” people are not neces- sarily clamoring to be “banked,” there are cultures where wealth accumulation is not even a legitimate goal. In such cultures there are leveling mechanisms designed to prevent any one person or group from gaining wealth greater than the others in the society. While the potlatch of the Northwest Coast Native Americans (in which valuable goods are routinely destroyed) is long gone, similar mechanisms exist all over the developing world—such as a public feast or an expensive wedding, or the redistribution of graz- ing animals when a family comes into wealth. All of this is not to say that poverty in the developing coun- tries is a happy state, or that the poor have no desire to improve their lot—clearly they do. The point is that we outsiders need to be careful not to assume that our interventions are the right ones or the right starting point. 4. There is a difference between entrepreneurs growing the economy, and people generating income. One of the pillars of microfinance was its assumption that the poor are entrepreneurial. With all our advantages in the advanced economies, it is obvious that only a small percentage of people are entrepreneurs. The rest of us are content to be employees or freelance gig workers. Similarly, the average petty trader or subsistence farmer selling products in a roadside market did not choose to be an entrepreneur, but rather to generate enough income to survive. As for economic growth, a critical determinant of economic potential is the question of whether a small trader or farmer has the room to expand or grow even with an injection of credit. Almost by definition, the barriers to entry into the market are low for a petty trader or small farmer. Anyone can set up shop. Since the small trader is often part-time (e.g., fishermen’s wives or farm people in slack season), they move into the market and add another degree of saturation to an already crowded field, often made more crowded by the presence of microfinance. And since the opportunity costs and the barriers to entry are low, higher technical knowledge is generally lacking, profits (and risks) are low because transactions are small (sometimes We are well advised to acknowledge a good dose of humility about how far, really, we have come, and how much, really, we know about poverty.