Development as Freedom
The word “development” has many meanings—even within the “development community.” For Amartya Sen, the Nobel-winning economist and philosopher, development is freedom. Sen’s “freedom” is not the freedom of libertarians—not merely freedom from interference—but increased agency in one’s life, increased control over one’s circumstances. Many things bestow such freedom: income, education, equal rights, the right to vote.
In conducting the review of the impacts of microfinance that is the core of my book, I found Amartya Sen’s conception of development to be one useful frame for organizing my thinking. If development is freedom, then the question of the impact of microfinance becomes: when does microfinance enhance freedom and when does it restrict it? This question frames many themes: the potential for credit to be exploitative (usury); the transparency, reliability, and flexibility of financial services; the empowerment of women; and how group-based joint liability translates into peer support and peer pressure. I split chapter 7, the one on development as freedom, into two parts: theory and evidence. I’ll share some highlights here. A draft version remains on my blog.
The first theme I tackle is usury. Or at least I try to tackle it: for millennia, philosophers have debated how to judge when a loan’s terms are exploitative, and I fail to end the debate. Many religious traditions contain injunctions against charging any interest. In the face of the manifest impracticality of that rule, the Roman church eventually shifted to the notion of just price. But defining the just price for credit is essentially impossible. One common referent here is profit: the price is too high if there are any profits, or at least if there are excessive profits, however defined. But I cite a CGAP paper by Rich Rosenberg, Adrian Gonzalez, and Sushma Narain, finding that eliminating all profit in microcredit could reduce interest charges by only a sixth. Mainly, microcredit credit is costly for customers to acquire because it is expensive for producers to provide. (According to my analysis of MIX data, after adjusting for inflation, the 50th-percentile rate is about 20% in South Asia and 30–-35% in the rest of the world.)
I do offer one take-home lesson on interest rates. While it is hard to judge levels as good or bad, it is easier to judge trends. Where interest rates are falling, competition is probably empowering consumers at the expense of producers, just as in economics textbooks. A CGAP study by David Porteous of three microcredit markets found that in two—Bolivia and Uganda—microcredit rates had fallen steadily relative to standard commercial rates. In the third, Bangladesh, they did not fall within the study period, but were low to begin with.
Influenced by Portfolios of the Poor I then move to aspects of financial services other than price: transparency, reliability, flexibility. Though not all hot-button issues, these traits could matter at least as much as price for how empowering or otherwise a service is for clients. I find that microfinance institutions could do much better in communicating the costs of their products in way clients can understand. Quoting Annual Percentage Rates (APRs), as emphasized by MFTransparency, would help borrowers comparison shop. More-intuitive measures such as total payments can also help potential borrowers judge how much credit they can afford.
As for reliability, here microfinance excels. Compared to the informal services like loans from relatives, formal microfinance services are dependable. If Pro Mujer tells a woman she can get a new loan if she makes the next 13 payments, she can bank on that. The unfortunate flipside, however, has been inflexibility. Loans may follow rigid 26-week cycles, but husbands don’t fall sick and generate medical bills with such neat regularity. And if you fall behind on payments, the pressure to catch up, from the lenders and from peers, can be intense. That, in my view, is part of the story behind microcredit-linked suicides in India. One leader in breaking the equation between reliability and rigidity has been the Grameen Bank. Its “top-up” feature allows borrowers who have repaid at least half a loan to reborrow the paid balance, making the loans more like lines of credit. It is also one of many established institutions that offers liquid savings accounts.
In the chapter, I then descend from theory to evidence. Although researchers have studied empowerment in quantitative terms (the randomized study of microcredit in India checks for impacts on whether women report making spending decisions for their household), I found it natural to focus on the qualitative research. This consists of narrative analyses by people who spent a month or year in villages or slums where microfinance was done and closely observing the role it played in people’s lives. As usual, the evidence is fragmentary. Like the well-known randomized studies of the impact of microcredit on poverty, the anthropological ones come from a few times and places.
I find stories both positive and negative. One example on the positive side: after conducting research on Self-Help Groups (SHGs) in the Indian state of Orissa, the late Shashi Rajagopalan wrote about how it was a breakthrough for many women to do formal business in public:
Almost all women spoke of the widening of their world because of the SHG. They said that it was not as if they had not been out of their villages earlier. More than the geography, it was the agenda for which they now travelled [to visit a bank], and the fact that they travelled, not with family members, but with friends from other castes, that made them feel that their world had become larger.
And from the work of Naila Kabeer, here is a Bangladeshi woman on her experience with the government-run Small Enterprise Development Project:
If I had not gone to that SEDP meeting, had not taken a loan, had not learnt the work, I would not get the value I have, I would have to continue to ask my husband for every taka I needed. Once I had a headache, I wanted one taka for a bandage to tie around my head, I wept for eight days, he still would not give me the money.Just one taka.
In contrast, anthropologist Lamia Karim writes disturbingly of how peer pressure in solidarity groups in Bangladesh turned ugly:
Women would march off together to scold the defaulting woman, shame her or her husband in a public place, and when she could not pay the full amount of the installment, go through her possessions and take away whatever they could sell off to recover the defaulted sum. In circumstances when the woman failed to pay the sum, which happened several times a month in the NGOs [non-governmental organizations] I studied, the group members would repossess the capital that the woman had built with her loans. This ranged from taking away her gold nose-ring (a symbol of marital status for rural women, and removing it symbolically marks the “divorcing/widowing” of a woman) to cows and chicks to trees that had been planted to be sold as timber to collecting rice and grains that the family had accumulated as food, very often leaving the family with no food whatsoever. The women who committed these acts did so at the exhortations of NGO officers, but they also considered these acts to be “protecting their investments”, and the defaulting woman as someone who had “broken faith with the community.”
If forced to generalize, I would suggest that the most famous form of microfinance—group microcredit—appears to do the least for development as freedom. It stands to reason: being on the hook for someone else’s loan, or coming under peer pressure if you fall behind on your own, sounds constricting, not empowering. Notably, the SEDP, of which Kabeer writes positively, was an individual lending program, not involving groups. India’s SHGs, though obviously group-based, also appear less problematic; but perhaps by the same token, they tend not to be tightly managed from a financial point of view, requiring ongoing subsidies. Financial laxity is naturally empowering, as long as there is someone else to pay the cost.
In sum, I see financial services as inherently empowering—after all, they exist to help people manage their financial affairs—but not automatically so. I conclude:
Social entrepreneurs and investors should thank the microcredit pioneers for building a global movement to bring financial services to the poor—and live up to the spirit of that movement by experimenting with and scaling up alternatives.
Loans are most worrisome from the perspective of development as freedom. The more the microfinance movement moves away from credit and toward savings, insurance, and money transfers, the more it will realize its potential to empower.
Comments
Dear David
Dear David
I would like to start from your peroration on functioning of Microfinance through the lens of (A sen’s) Development as Freedom. both theoretically and practically as well.
Theoretical Premise.
Microfinance functioning and ‘freedom’ at client level
1.The concept Microfinance represents a package of pro poor services including micro credit as one of components. The isolated micro credit has unique functional values. Unlike other counterparts of MF like micro savings, ,micro insurance, micro pension with intended valued purposes on the one hand, and other development direct inputs like health, education with restricted freedom for using it for intended purposes without any options to the one’s values on the other, .micro credit is a financial input (loaded with purchasing power) providing unrestricted freedom for the holder ‘to do’ anything with it according to the values of the holder once it reaches to his/her hands. Further, if one has an assumption that there is near absence of supervision of ‘end use’ of micro credit at household level after sanction by the MFIs and also acceptance of mere declaration of purpose of micro credit best suited to already structured product (one size fits for all )to the convenience of the lender, this ingenious system also facilitates ‘freedom from constrains’ too for his valued based utilization.
Human value system & Freedom
2. There is conflicting tendency between the internal value system and external value system in the universe with more influence of latter on the former. Eventually intended freedom for positive impact, yield place to unintended freedom with negative impact at individual level in the real world questioning the validity of the concept ‘Development ’as freedom
Here for further deeper analysis, it would be useful to appreciate Sen’s two types of freedom viz., ‘constitutive freedom’ as the primary ‘end’ of development ( freedom to access to factors contributing more basic necessities of the life ) and ‘instrumental freedom ’as principle means of development (different instrumental freedom inter relating and complementing each other) merit attention
Here the problems arises from the dynamics of instrumental freedom in MF arena and the conflicting tendencies among the different value systems both internally and externally in the given society or poverty segment by and large and the status of individual in particular as discussed above. Under Sens’ two types of freedom referred to above, microcredit falls under the category of instrumental freedom for providing greater financial choices for further development of the poor.
Practical realities
Now let us see how the factor ‘financial access’ performs as per one’s internal value system and the consequences there of using the same illustration (farmer’s increased positive freedom through credit access to hire more labor for farm work something he values) referred to by Ahmed Jazayeri in your blog posting ( no response to the comments by him and me for reason known to you )
It would be interesting to perceive what happens after micro credit reaches the poor farmer household with the positive freedom (intended freedom) for hiring labor for some farming purposes which the farmer values more at the time of financial access.? In the illustrated case, the internal value system is shifted subsequently from usage of the credit for hiring labor to medical treatment for malaria disease resulting negative consequences ( disposing cow for repayment of loan) in the reference case. In banking parlance, it is misutilization of credit since the purpose(farming) for which loan is raised, is defeated and it is unethical too. From farmers’ point of view, medical expenses is a necessity and deserves priority value to him. . So to say, under instrumental freedom concept, there is conflicting values and also negative consequences at individual level. As the internal values are influenced by the external factors like currently prevailing welfare situation of the individual and other family members in the household/society as well there by shifting intended values to performed values later. Further, there is also incompatibility of values at individual level since the client as a sincere borrower may wish to utilize the credit for farming purpose and repay the loan out of farm income and at the same time contextually, as prudent earning member of HH he also wishes to spend for medical expenses for his mobility & survival on priority . Given the conflicting freedom situation, infested with incompatibility of values at client level on one hand, and structured product like micro credit for multiple options at institutional level on the other, suggest a kind of micro management of value satisfaction. This would facilitate for keeping the positive freedom sustained without negative consequences. through proper sequencing instrumental freedom with multiple diversified pro poor MF products and at the same time under constitutive freedom, the internal values at client level moving towards ‘primary end’ without any derailment. It therefore demands a change and not only the change in outcome , but also change in the process too which works for such change.
A way forward
.Under the Sen’s conceptual values of freedom. suggested social process financial reengineering for ushering in such change in MF industry involves following tasks.
1. Under instrumental Freedom for financial access to poor , financial literacy on all micro financial services including savings, insurance. micro pension as protection products from vulnerabilities besides micro credit for income generation livelihood activity ( not for consumption) should reach the target poor holistically so that they are empowered to have more freedom and choices for accessing simultaneously all necessary input factors for basic living. This situation help them to satisfy their internal values for all instruments equally with no need for shifting or changes contextually . In the case of the farmer in the illustration, , if his capability is increased to enhance the freedom to access to multiple financial inputs with non financial or direct ones as complementary or supplementary from other stake holders-state , he would pay wages for hired labor for enhanced production and income and at the same time, his medical expenses is taken care by micro insurance (health) keeping his livestock asset in tact without disposing for repayment. Micro credit is also ethically used. sustaining the compatibility of values at client level
2. As corollary to the above, sequencing the instrumental freedom depending ones’ positive values in the poverty pyramid is necessary for a sustainable development
3. Coming to in MF industry, most of the MFIs provide credit services only which alone is not adequate under ‘constitutive freedom to ensure the primary ‘end ‘ poverty reduction’ . Here it may be noted that credit or loan is not a direct consumable development input like health ,education etc., The money as a medium of exchange can provide unrestricted freedom to satisfy any type of internal values impacting with or without negative consequences. Contextually. Empowered with this purchasing power of the money, however unethical or incompatible one (common in poverty segment) poor may attach more internal ‘value’ for utilizing the loan even for consuming alcohol and tobacco justifying as a means of energy or of forgetting onerousness of work and everyday life. In the case of empowerment of women through micro credit , negative fallouts such as group mortality , drop outs, domestic quarrels, sex abuse etc were also witnessed. All these events eventually have demoralized the ‘constitutive freedom’ with negative consequences in the livelihood in poverty segment in particular.
So to say ,in the poverty sector, mere freedom to access ‘credit alone’ without any constraints , provide opportunity for alternative uses(more choices) but ultimately end up with negative consequence due to influence of external value system (social capital/institution/market/Media) fuelled by neoliberalism thereby leading to over consumerism or conspicuous consumption, multiple borrowing , high level of indebtedness. debt trap etc in the demand side. On the other hand in supply front, unethical competition, ‘one size fits for all’ in the products and services, rigorous recovery practices commercial orientation etc., do not ensure conducive instrumental freedom for ushering in desired development . ( Perhaps Sen has too much of assumptions in Micro credit dynamics the development trajectory ) These facts merit the attention of proponents of ‘financial inclusion’ and the innovators of delivery mechanism more particularly technology based ones for financial access for exercising caution..
In sum, two factors .a) instrumental freedom to access multiple instruments simultaneously ( development oriented financial and non financial services by all stake holders ), with adequate literacy and supervised credit system and b) sequencing them depending on the internal value system in the poverty pyramid , need to be considered for reaching the primary end i.e. poverty reduction . The stake holders in both public and private sector jointly have a positive role in arranging the instrumental freedom to the poor in a coordinated manner and entailing the poor unrestricted constitutive freedom there by.
Thank you for sharing my views
Dr Rengarajan.
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