World bank microfinance
The World Bank and Microfinance:
An elephant trying to build a bird nest
The merits of the small-scale sector in the context of less-developed countries (LDCs) are both logically sound and have been empirically proven in the literature. Micro-enterprises take advantage of the abundant labor supply characteristic to LDCs to better maximize the capital/labor function. However, microenterprises are an exceptional form of business which is reflected in their unique fiscal needs. Those special needs are usually classified as micro-loans.
Small businesses take on markedly more risk than larger enterprises usually with little collateral. For this reason, standard credit sources (funds from commercial or development banks (are customarily inaccessible to these firms in a form conducive to efficient productive investment, or worse, credit is unavailable altogether. The capital starvation of small industries is a economic development tragedy.
Governments and international organizations are only now realizing the advantages of providing micro-enterprises with credit. Financial institutions have been created to alleviate the financial repression of small industries such as Grameen Bank of Bangladesh, but the major lenders to microenterprises are informal credit institutions.
Micro-lending is a development strategy based in neo-classical theory of capital and growth rates. Presently, LDCs financial systems are inefficient. In LDCs, the credit systems generally ration credit in lump sums to the best credit risks. This activity is commonly highly adverse to small business, and in LDCs (where small business best uses available production factors (a low-cost macroeconomic growth method is artificially hindered.
Therefore, it could be argued that multilateral organizations should be petitioned to remedy the credit market failure. In my investigation I will evaluate the potential of the World Bank as an instrument in microenterprise development. There is a conspicuous absence of literature on World Bank involvement in microfinance, though I believe that the World Bank's role -an organization born in the ideology of post-war planned development theory -should be defined in this new market driven area of economic development.
Modern development economics began during the post-war era as a complement to the growing political independence in Asia, Africa and Latin America. The post-war development economists heeded pioneer classicists' -Smith, Malthus and Ricardo - teachings; placing emphasis on capital, population and what Adam Smith termed the "progress of opulence," (Robbins 1968) which states that once the growth process has begun, it is self-reinforcing. However, early development economists went beyond their classical and neo-classical roots and investigated policy, implemented by an active state, that could direct or accelerate the growth process.
Policy-run development dominated the 50s and 60s and emphasized almost solely GNP per capita growth through capital accumulation and industrialization based on import substitution. Additionally, a general distrust of markets and impending market failure led development economists to believe that planned investment was the most auspicious path toward economic growth. Robust growth models, centered on industrialization, surplus labor utilization, import substitution all controlled in a centrally planned environment, permeated development theory.
Policy makers did not need to condone economists' theories to move toward planned industrialization. The political and ideological environment of the time provided the impetus toward centralization. Nonetheless, many economic suppositions during the 50s and 60s were in line with the predominant ideologies, therefore, the political economy had much theoretical backing. For the post-war development economists, though they clung to the efficacy market forces, believed in economic obstacles to development that could only be overcome by well-formed policy, especially policy geared toward rapid industrialization.
The common thought by post-war development economists that for successful industrialization to take place, a less developed country must plan the framework of development much like the planned growth of a large firm (Rosenstein-Rodan, 1943). The important components of the planned growth is "skilling" the labor supply and large-scale planned industrialization. Part of the planning was to develop complementary industries within the country, and thus, reduce the risk of not being able to sell goods produced. Additionally, indivisabilities of inputs, processes, or outputs require countries to develop industries to optimum scale hence they may be sustainable. Called the "big push" by Rosenstein-Rodan who believed that no one industry might be profitable on their own. Promotion of several complementary industries, however, causes demand increases for the output of all the industries involved. Scale optimization a necessary mechanism to break out of the "low level equilibrium trap" created by a laissez-faire system (Nelson, 1956). Such a trap was seen by Nelson as a type of market failure where a LDC's macroeconomy reaches a market equilibrium but demand meets suply only at the subsistance level. Hirschmann (1958) too believed that markets had many shortcoming when it came to development policy. He endorsed unbalanced growth; taking advantage of forward and backward linkages. Whereby, the promotion of certain industries could expediate the growth of others.
Once industrialization takes place, the homogeneity of an agriculturally based country is lost. The Lewis (c1984) dual-sector model probes the interactions between two economic sectors -the informal and formal. Lewis contends the ultimate question for a country's development is how the modern sector expands
while the traditional sector contracts.
In the language of Lewis, a country's economy is comprised of the "capitalist" sector and the "noncapitalist sector." The capitalist sector is defined as that part of the economy that uses reproducible capital, pays the capitalist for the use thereof and employs labor for profit-making purposes. Production in the capitalist sector does not just include manufacturing; it can include any agent of production that hires labor and sells output for profit. What Lewis delimits as the non-capitalist sector -traditional or informal sector -is that part of the economy that does not use reproducible capital and does not hire labor for profit. In this largely subsistence sector, output per capita is usually much lower because of the lack of labor enhancement by use of capital. Lewis depicts the traditional sector as chiefly agricultural, thus, giving the impression that the sector is composed of subsistence farming where the average output is zero.
Lewis construes in his dual sector model as a fundamental relationship between the two sectors. As the capitalist sector expands, it draws labor from the non-capitalist sector. According to the model, the informal sector has an virtually unlimited unskilled labor supply, making labor extremely elastic at a given wage above the subsistence level. Given the large pool of unskilled labor, and consequently the near-perfect elasticity of labor supply, industry can expand or new industry can be created without encountering any shortage of unskilled labor until the point where surplus labor from the informal sector is absorbed.
The Resurgence of Neo-Classism
Though the development community was enthralled with planned development during the 50s and 60s, the 70s and 80s were marked by a resurgence of neoclassical economics. Planned economic development in many countries had either had been proven ineffective by the 70s or had unforeseen negative effects due to policy-induced distortions. The policy distortions caused non-market failures in many countries which led to the critique of comprehensive centralized development controls. Price distortions had to be removed in developing countries, and thus, the market took on a more prominent role in development economics.
Though there has been a resurgence of neoclassicism in the development community, the debate over the role of some centralized body -public or private -in guiding development, is to present, unresolved. Policy prescriptions for development range from the kind of central planning found in the 50s and 60s to completely market driven development strategies (White, 1992). However, learning from the past, government and private multilateral agencies are trying to keep the market in mind, but they have yet to shed completely their non-market operations (in Perkins and Roemer, 1991).
The World Bank acts in a non-market setting and chooses development projects and funds them though what the World Bank calls Structural and Sectoral Adjustment Loans (Harrigan and Mosley, 1991). The validity of the projects or programs, however, are not market determined. Non-market activity by the World Bank can have ambiguous or even negative effects on the macroeconomy (White, 1992). While certain industries or sectors backed by World Bank aid fair well the non-market nature of the aid may crowd out most efficient market constrained activity in the private sector. Additionaly, private sustainable investment is an importanat fator in LDC development. Aid that crowds out private market activity in both production and investment is detrimental to macroeconomic growth. This micro-macro paradox explains why of 245 projects evaluated by the World Bank, 85 percent of the World Bank's projects faired well, but the countries in which the projects were implemented, the macroeconomy was not proven to be better off (White, 1992).
Microenterprise and the Informal Sector
An entity in the macroeconomy never conceived by either the fathers of the World Bank nor Arthur Lewis in his dual sector model is the microenterprise. Characterized by their flexibility and rapid response to growth opportunities, small-scale enterprises can promote economic growth and equality. They operate in the informal sector thereby contradicting Lewis' assumption that activity in the informal sector is homogeneous. Unlike large-scale industry -concentrated in urban areas where services are more readily available - microenterprises can be found throughout a country. Therefore, microenterprise can be a dynamic vehicle for indigenous participation in manufacturing (Parker, Riopelle and Steel, 1995).
Microenterprise activity has had a profound effect on a country's economic growth since the turn of the century. However, until recently, policy makers' belief in trickle-down strategies for development have greatly underplayed the importance of microenterprise. The promotion of microenterprises in developing countries is justified in their abilities to foster economic growth, alleviate poverty and generate employment (Livingstone, 1991).
Small-scale industries rely more on labor than capital intesive production, thus employ more efficient utilization of production factors as compared to large industries by exploitation of abundant unskilled labor. Allocation of savings for capital investment advances capital accumulation within the informal sector. Additionally, producing a competitive environment, in which, national entrepreneurs can become better equipped to compete with large and inefficient public or foreign industries (Balkenhol, 1990).
Parameter 1: Size Business Defined by number of EmployeesSource: www.gdrc.org
Category: Payday loans