Milford Bateman's Main Arguments

Milford Bateman is a freelance consultant and a visiting professor at a University in Pula, Croatia. Prior to that Dr. Bateman served as a Research Fellow at the Overseas Development Institute and, since 2005, Visiting Professor of Economics at the University of Juraj Dobrila Pula, Croatia. He is the author of Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism, a book that has generated much controversy. In my post I would like to summarize the main points that were brought up by Dr. Bateman with links to further reading. The Microlinks team will be interviewing Dr. Bateman at the MFC Annual Conference on May 18-20.

Summary of Key Points

• In the Background Note that he wrote in March 2011, Bateman pointed out that recently a lot of foreign aid has flown into microfinance because of the neoliberal political agenda of the developed countries rather than because microfinance truly reduces poverty. Bateman further argues that objective evaluations have proved that microfinance either does not contribute to poverty reduction or increases poverty while creating another kind of “poverty trap”.
• Bateman further expands on these points in the paper that he co-authored with Ha-Joon Chang, Microfinance Illusion.  In this paper, he argued that there has not been any quantitative proof that microfinance actually reduces poverty. Some of the first evaluations of microfinance programs were conducted by Shahid Khandker in 1998. Khandker concluded that based on his findings for Grameen Bank, ASA and BRAC, microfinance programs reduced poverty by 5% on average. Bateman argues that Khandker’s studies were commissioned by MFIs and therefore were not objective. Later studies that were conducted by academics used randomized control trials method (RCT) and were independent. Examples of such studies include findings by Jonathan Morduch in 1999 and Esther Duflo in 2010; both studies stated that microfinance programs had either no or negative impact on the borrowers. In 2009 Morduch and David Roodman revisited Khandker’s study; their revised version concluded that microfinance programs had no effect on poverty reduction.
• Since there has not been any quantitative proof that microfinance programs reduce poverty, why is so much foreign aid is flowing towards microfinance programs? According to Bateman, microfinance is a tool that fits well with the neoliberal agenda of the developed world. Bateman argues that donors find it is easier to shift the burden to the poor under the pretenses of encouraging entrepreneurship and private sector development than to develop collective goods and social security nets that will help the poor escape poverty (Conditional Cash Transfers, grants etc.) Therefore, Bateman argues that foreign aid is flowing to microfinance programs due to political reasons rather than in order to reduce poverty. Furthermore, Bateman argues that while promoting a culture of collective accountability and public shaming (via group lending), microfinance destroys bonds created in the rural communities among the borrowers.
• Further, Bateman argues that not only does microfinance not reduce poverty, but it actually increases poverty and creates an additional “poverty trap” by placing borrowers in greater debt and by channeling funds such as savings and foreign aid from other sectors that would bring sustainable development in the long run. One such sector is small and medium enterprise (SME) development. Bateman believes that SME finance is being depressed by the development of too many microenterprises. His arguments are the following:

• Microfinance ignores the problem of “fallacy of composition” by encouraging creation of huge informal sector that supplies more goods than there is demand for. If hundreds of microenterprises decide to buy a cow and sell milk, eventually they will have to lower the prices of milk in order to stay competitive, which in turn lowers their profits and makes it impossible to repay loans with high interest rates. Further, this development depresses market prices of milk and makes it impossible for SMEs, such as small milk farms, to compete. If not for too many microenterprises, SMEs that produce milk would eventually scale up and decrease prices in a more sustainable way, which would contribute to job creation and economic development.
• Microfinance runs into the problem of adverse selection. Microloans offer very high interest rates that make them unattractive for SMEs but microenterprises (that have nowhere else to borrow) end up borrowing at these high rates. Therefore, high interest rates and hidden fees encourage lending to very poor and financially uneducated borrowers, which in turn results in higher defaults on microloans.

Therefore, according to Bateman, microfinance puts the poor in further debt and hinders economic development. His argument is supported by another expert, Ha-Joon Chang, who believes that creating more microenterprises will not reduce poverty; instead poverty reduction takes place due to innovation, scalability, and creation of enabling environments (existence of institutional and operational structures necessary to raise the productivity of businesses). Ultimately both Bateman and Chang argue that productivity of microenterprises rarely increases, while SMEs have the capacity to achieve productivity gains. But when microloans are made easily available, borrowers use their savings and money received from foreign aid to repay their loans, instead of increasing consumption. Therefore, SMEs that operate in such environments are unable to sell their products because potential customers spend all of their disposable incomes to repay their loans. In the long run, SMEs go out of business and borrowers continue increasing their debt.

Bateman's Recommendations

Here are some of the suggestions that Bateman proposes:

• Usage of simple cash grants and Conditional Cash Transfers
• Promotion of micro-savings in order to accumulate capital locally (further use of credit unions and savings banks)
• Implementation of local industrial policies that can provide "patient capital" to promote sustainable growth-oriented businesses rather than those oriented on short-term profit maximization.