Tag Archives: microfinance

the missing middle

The New York Times Magazine featured an article on microfinance and celebrity contributions this past Sunday. Natale Portman, advocate for microfinance and poster child for FINCA told the NY Times, “It’s the way it works, I guess. I’m not particularly proud that in our country I can get a meeting with a representative more easily than the head of a nonprofit can.”

Well, who is? But it is the way it works. Stars — movie stars, rock stars, sports stars — exercise a ludicrous influence over the public consciousness. Many are happy to exploit that power; others are wrecked by it. In recent years, stars have learned that their intense presentness in people’s daily lives and their access to the uppermost realms of politics, business and the media offer them

a peculiar kind of moral position, should they care to use it. And many of those with the most leverage — Bono and Angelina Jolie and Brad Pitt and George Clooney and, yes, Natalie Portman — have increasingly chosen to mount that pedestal. Hollywood celebrities have become central players on deeply political issues like development aid, refugees and government-sponsored violence in Darfur (NYTimes).

However, while celebrities are able to broadcast a particular message to the masses, the issues are, not surprisingly, more complex than they seem. The New Yorker points out that while microfinance has won Muhammad Yunus a Nobel Peace Prize and remains to this day a chic economic innovation made popular by Hollywood, it is not the magical solution it is purported to be.

This vogue has translated into a flood of real dollars: institutional and individual investments in microfinance more than doubled between 2004 and 2006, to $4.4 billion, and the total volume of loans made has risen to $25 billion, according to Deutsche Bank. Unfortunately, it has also translated into a flood of hype. There’s no doubt that microfinance does a tremendous amount of good, yet there are also real limits to what it can accomplish. Microloans make poor borrowers better off. But, on their own, they often don’t do much to make poor countries richer.

This isn’t because microloans don’t work; it’s because of how they work. The idealized view of microfinance is that budding entrepreneurs use the loans to start and grow businesses—expanding operations, boosting inventory, and so on. The reality is more complicated. Microloans are often used to “smooth consumption”—tiding a borrower over in times of crisis. They’re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees.

Not everyone can be, nor should everyone be an entrepreneur. Microfinance is promising for some, but the “micromagic” dream shouldn’t be oversold. To read the rest of the New Yorker article on microfinance, click here.