microfinance economic growth informal sector suicide

Micro-finance Con-men and Big Business Bullies
india yunum usurious private land

India's micro-finance suicide epidemic

Bad people can ruin a good thing -- and worsen a bad thing. Indians deal with losing their woods and jobs and when they can’t cope, some do themselves in. We trim, blend, and append three 2010 articles from: (1) Miller-McCune, July 18, on microfinance by Brad Wittwer; (2) BBC, Dec 6 on suicide by Soutik Biswas; and (3) BBC, Dec 17, on deforestation by Vinod Verma.

by Brad Wittwer, by Soutik Biswas, and by Vinod Verma

Microfinance provides capital to small entrepreneurs, often poor women, who previously got none. Their businesses usually grow, so borrowers repayment rates are high.

But recent research links its success with national economic growth. Critics suggest it only succeeds in economies that are already beginning to bloom. [Yet are they sure it was not the other way around, that perhaps the larger macroeconomic expansion rides the coattails of microfinance?]

Microfinance has recruited more than 100 million customers worldwide and 10,000 microfinance institutions; Bangladeshi banker Muhammad Yunus received the Nobel Peace Prize in 2006 for his microfinance efforts.

Critics complain microfinance competes with the manufacturing sector and the formal work force and thus microfinance is inhibiting true industrialization in countries that might to be ready for it. The worker is lured away from a formal, paid position so he can remain in the informal sector. (Of course, many might suggest this might not be a bad thing.)

JJS: So, when somebody engages in microfinance, they are “lured” away from industry, but when somebody works in industry, they’re not “lured” away from microfinance? Why the double standard? And what’s wrong with industry competing with microfinance? Isn’t competition what makes markets efficient? Funny how fast apologists abandon principle.

There may be sounder reasons for criticizing microfinance.

More than a third of the 30 million households that have taken micro-credit in India live in Andhra Pradesh. There micro-finance companies have given out 80bn rupees ($2bn; £1.3bn) of loans. The majority of the borrowers are women.

The government estimates families that have taken micro-loans in Andhra Pradesh have an average debt of $660, and an average annual income of $1,060. This means more than 60% of their fragile, uncertain income is being spent paying off loans.

Micro-loans -- annual interest rates vary from 24-30%, compared with the 36%-120% charged by usurious money lenders -- can lead impoverished, ill-educated people to ruin.

According to the government, more than 80 people have taken their own lives in the last few months after defaulting on micro-loans. Banks, in turn, have stopped lending to micro-finance companies.

"Multiple lending, over-indebtedness, coercive recovery practices and unseemly enrichment by promoters and senior executives [of micro-credit companies] has led to this situation," says Vijay Mahajan, chairman of India's Microfinance Institutions Network.

JJS: So microfinance gets critiqued by the establishment and misused by the unscrupulous. That happens to a lot of good ideas. And the unscrupulous are not just petty con men but also powerful insiders.

Bigger picture, why is the playing field tilted so much to favor lenders over borrowers? Rather than be lenders, why are savers not investors, sharing risk with entrepreneurs?

And must all income be wages or credits (or debits to bankers)? There are “rents”, the value of land and resources, a value generated not by any lone owner but by the presence of society. If members of society got a share of that spending stream -- as residents of Alaska get an oil dividend -- then no one would be so desperate for loans.

Also, rents would not be concentrated into the pockets of a few, thereby lifting them above the law.

A subsidiary of the Vedanta mining group in India has cleared forestland apparently in violation of Supreme Court orders.

Papers made available to the BBC reveal that Sterlite Industries cut down the trees while constructing a new power plant in Chhattisgarh state.

Last year the chimney of the plant collapsed, killing more than 40 people.

Sterlite officials deny unlawful deforestation, arguing they have only cut down trees on privately-owned land.

Sterlite controls controls 51% of shares in the Bharat Aluminium Company (Balco) in Chhattisgarh and is also in possession of 1,751 acres of forestland.

Papers seen by the BBC accuse the subsidiary of carrying out "non-forest activities" in the area without prior permission.

The two government reports -- dated October 2010 -- said that trees were cut down in an area owned by the state government which is officially designated as forest land in government records.

The Vedanta group has been in the news recently after the Indian government denied it permission to mine bauxite in the Niyamgiri hills in the state of Orissa.

An inquiry to establish whether Balco is in contempt of the Supreme Court's orders -- which banned the felling of trees at the site in 2008 -- is now under way in relation to the Chhattisgarh allegations.

A Congress party leader in the state has named senior Balco officials as being in contempt of court.

Balco insists that any tree felling was carried out following permission granted by district officials on private land only -- and that the Supreme Court had not placed any restraints on such action.

It says that no trees have been felled on government-owned forest land.

However, documents accessed by BBC appear to show that this is not the case. The documents contain satellite-mapping technology which reveals that a large number of trees were indeed felled in about 90 acres of forestland.

JJS: Whether timber or aluminum or any other natural resource, its value in the site -- not including the value added by extraction -- is a value that belongs to society.

If the members of society were to receive that value, then a few corporations would not get that value. Missing that extra income, corporations would be less powerful and unlikely to show contempt of the supreme court of the land. And members of society, once endowed by this extra “rental” income, would become more engaged citizens -- not to mention eager to heal the land, since the healthiest land yields the highest rent.

But this geonomic scenario all begins with articulating and extolling the ethic of holding natural values in common.


Editor Jeffery J. Smith runs the Forum on Geonomics.

Also see:

While big US insurers outsource some profit …

Poor farmers who buy basic tech become entrepreneurs

Corruption Leads to More Corruption

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