Institutions
The Fallacy of Microfinance
Microfinance has been billed by many as a solution to the persistent problem of poverty. This is as result of the fact that it has been hailed to create and expand micro-enterprises and in the process improving the socio-economic situations of those that own the micro-enterprises, who generally tend to be women. However, according to Banerjee, Duflo, Glennerster, & Kinnan (2014), microfinance does not necessarily lead to people rising out of poverty. The argument held by Banerjee, Duflo, Glennerster, & Kinnan (2014) gives credence to the apprehensions some have had about the romanticized stories on microfinance. I am in agreement with Banerjee, Duflo, Glennerster, & Kinnan that microfinance is not a piecemeal solution to poverty.
Money acquired from microfinance institutions is often used for non-business purposes. The idea behind microfinance was that individuals owning microenterprises could get financing to expand their businesses and in the process move out of poverty. However, in often cases, such micro-enterprises are used merely as pretexts to acquire the loans. The proceeds from the loans are in fact used to finance other socio-economic imperatives such as education and healthcare.
In essence, microfinance only helps the poor to cope with poverty rather than getting them out of it. Banerjee, Duflo, Glennerster, & Kinnan (2014) hold that this is as a result of the fact that poverty is not merely as a result of low levels of income; it is also a factor of high levels of vulnerability to disruption.
Consequently, in order to sustain their present levels of poverty, the poor are forced to borrow more and often regularly. In this case, it would then be interesting to evaluate the reasons for preferences on microfinance rather than other avenues of financing for the poor. It is important to note that microfinance is not preferred by the poor because of its propensity to create wealth. It is rather due to its reliability when compared to other informal credit and savings structures such as table banking that are available to the poor.
High repayment rates in the microfinance category have been used as evidence of the success of microcredit (Banerjee, Duflo, Glennerster, & Kinnan, 2014). However, an in-depth evaluation of the same reveals that the high repayment rates may not necessarily be motivated by simultaneously high returns from the microenterprises or due to the fear of losing collateral. It is especially the case considering that interest rates charged on microcredit tend to be higher than traditional credit; Banerjee, Duflo, Glennerster, & Kinnan (2014) put the average at 25% with some running as high as 75%, hence high returns to warrant the high repayment rates may not be plausible. The high repayment rates are rather motivated by the need to maintain future access to the microfinance lending channel.
The concept of microfinance also presupposes that the poor are poor due to the lack of credit. However, lack of credit is not the only factor. Other factors such as literacy levels, the general level of a country's economic performance and healthcare also come into play.
Therefore, solely crediting a reduction in poverty on microfinance is not correct.
It is, therefore, the case that microfinance does not necessarily raise people out of poverty. This is especially the case considering that according to Banerjee, Duflo, Glennerster, & Kinnan (2014), monthly consumption for persons that have taken up microcredit does not increase at least in the medium term.
Lower taxes do not necessarily lead to better economic perspectives such as standards of living
One of the most prominent arguments especially by highly capitalist individuals and enterprises is that lower taxes are good for the economy. The said benefits for low taxation are as a result of enterprises then having the ability to create more jobs while individuals facing lower taxation have the ability to raise consumption. However, I am not in agreement with this argument. This is especially the case considering that according to Kleven (2014), Scandinavian countries have the highest taxation rates in the world (about 80%) yet their economic perspectives tend to be better than those of countries with much lower taxes.
Lower taxes can only improve economic conditions in a perfect economy. In a perfect economy, the lower taxes would be such that the gains that arise therein would be proportionally reflected on high levels of employment, improved wages, and increased profits for firms as well as increased consumption. However, it is the case that there is no perfect economy across the globe in which purely market forces dictate economic imperatives.
In the contemporary world, lower corporate taxation results in mere accumulation of profits by firms. It is as a result of the fact that firms do not act as the most suitable points for redistribution of the benefits arising out of lower taxation. This is especially so in economies that have embraced capitalism as the primary mode of production. In such a system, the owners of capital will be more preoccupied with raising their profits rather than equitably redistributing the benefits arising out of lower taxes.
For individuals, lower income taxes do not necessarily raise consumption on wealth creating assets. In most instances, lower income taxes imply that critical public provisions such as healthcare, child care, and transportation are borne by the individual rather than the state. As a result, a huge portion of the relatively higher disposable income is spent on these traditionally public provisions hence lowering the level of income available for consuming wealth creating assets.
The state, therefore, remains as the best point to redistribute public resources borne out of taxation. This is as a result of the fact that the state in its ideal sense does not have personal ambitions as is the case with owners of capital. There is an argument that high taxation may create a high distortionary effect. It is especially the case with regard to labor supply; high levels of income create lesser incentives for people to offer their labor.
However, a state’s expenditure policy has the ability to moderate the extent of the distortionary effect. According to Kleven (2014), expenditure policies in the Scandinavian countries are tilted towards transfers and work subsidies. Kleven (2014) holds that Scandinavian states spend huge amounts on subsidies and public provisions that serve to complement work. These public provisions include child and elderly care as well as transportation. Such an expenditure policy serves to reduce the distortionary effects that high taxes create. As a result, important economic imperatives such as labor supply and level of firm production are not adversely affected.
Consequently, higher taxation levels do not necessarily imply that firms and individuals will be worse off. This is especially the case in the event that the state adopts an expenditure policy that is geared towards equitable redistribution of the public resources that arise thereof. In such an instance, as is the case with Scandinavian countries, individuals and firms are more willing to trade off higher levels of disposable incomes for complementary public provisions.
References
Banerjee, A., Duflo. E., Glennerster. R., & Kinnan. C (2014). The Miracle of Microfinance?
Evidence from A Randomized Evaluation. Manuscript. (SKIM sections 3.2 - 4)
Kleven, H.J (2014). How Can Scandinavians Tax So Much? Journal of Economic Perspectives
28 (4): 77-98
