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On the Roles of Microfinance in Developing Countries

By reggiewhite13 Dec 05, 2013 2971 Words
Jordan Jackson, Reginald White
Chapter 3: Role of Microfinance in Promoting Economic Growth, Development, and Sustainability

“Much of the underdeveloped world grows and produces agricultural products. Because many of these underdeveloped nations have very little political clout with the rest of the world, and because farmers in wealthy nations have lots of political power, the goods from these poorer nations are tariffed and quota'd right out of the richer nation's markets.” -Keith Brown, Free Trade & Foreign Policy: The Independent Institute, May 1, 2000 Introduction

The quote above provides a very nice generalization of exactly what we will discover in this chapter: the roles of microfinance in promoting economic growth, development, and sustainability. Microfinance can provide exactly what most of the underdeveloped world needs: capital to invest in themselves in order to reach themselves out of poverty, thus creating self sufficiency. However, as Mr. Brown stated, what microfinance has failed to do (albeit it was not designed to do) is make these poorer farmers globally competitive. They cannot be competitive due to larger countries' inability to make the free market free for all nations, not just those who control most of it. However, even without making major strides on the global market, microfinance has done most of exactly what it was designed to do. It has brought most of its participants out of a fruitless future, one full of deabilitating poverty.

There are many statistics out on the books about microfinance's effect on the poor of the world. Throughout the chapter, we will go into further detail on how these statistics reflect the exact influence of microfinance on the world, poor and middle class. The statistics will reflect exactly what has been stated in past chapters: microfinance works. It isn't the end-all, be-all solution to the world's poverty, but it is a solid start to eradicate it.

Another topic we will cover in detail is the paradox between economic growth and sustainability, and whether or not they are mutually exclusive. An article, brilliantly written by Dr. Karen Higgins of Claremont Graduate University in California suggests that “limitless economic growth counters sustainability”. If the economy grows too big, will we end up exhausting our resources, thus actually making the economy more short lived?

Furthermore, we will go in depth on the effects of microfinance on the world, and more specifically, developed and developing nations. There is a plethora of information on what impact microfinance has on the world, mostly in the form of a poor farmer receiving a loan to buy supplies in order to make more product, so that the farmer's family can actually live on as well as sell their stock. However, there are also stories in which an especially lucky person receives a loan, invests in a good product or business, and actually goes from abject poverty to middle class. Such stories will be told later on in the chapter.

As you read, keep in mind that, as stated earlier, microfinance will not solve poverty and all its ills. Whether you are a passionate skeptic or supporter of it after reading this book, know that there are many more obstacles in the way of a poverty free world, those obstacles including political corruption, power inequalities on a global scale, climate change, war and conflict, disease, education, and availability of resources. By no means does microfinance seek to save the world. It does not mean to take the place of charity and giving, nor does it mean to take the place of hard work and perseverance. However, it does hope to make it easier for those who struggle amidst hard work, perseverance, and charity. It means to give every child a chance to live and be educated. In a world where nanotechnology and outer space travel are taken for granted, why does three quarters of the world still live on less than a dollar day? While we know that there are many answers to that question, we also know for a fact that microfinance can solve some of those problems.

What is Economic Growth, Development, and Sustainability?
According to the Center for the Advancement of the Steady State Economy (CASSE), economic growth is defined as: “....an increase in the production and consumption of goods and services. It entails increasing population and/or per capita consumption. It is indicated by increasing gross domestic product (GDP).” It goes on to say that “economic growth literally refers to an economy that is getting bigger, not necessarily one that is getting better”. According to BusinessDictionary.com, economic development is defined as progress in the economy, or a qualitative measure relating to it. It usually refers to the adoption of new technologies, the transition of agriculture-based to industry-based economy, and a general improvement in living standards Finally, according to Wise Geek, economic sustainability is “the term used to identify various strategies that make it possible to use available resources to their best advantage”.

So what do those definitions mean when we apply microfinance to them? Simply put, microfinance can be attributed to all three of these things. As has been proved since microfinance first stepped onto the economic scene, microfinance can cause economic growth in the simple fact that once a poor family receives a microloan, they can use it to invest in themselves or their children, thus making it possible for them to repay the loan, and in due time (in most cases) make a profit that will allow them to expand their propensity to consume. In terms of economic development, microfinance has also changed the face of businesses, small and large. Poor farmers in the third world can receive a microloan, and go from having to perform backbreaking labor to purchasing a machine to help them do it. Finally, as for economic sustainability, microfinance can assure that stocks are not going to waste, and in the case of poor farmers, they can actually sell their crops, instead of having to eat them to stay alive.

Give & Take: Factors Adding and Subtracting from
Economic Growth, Development, & Sustainability

As much as we would all love a straight answer to the question that is poverty and scarce resources, we all are aware that such a big problem is rooted in more than one thing. However, we all know that complex problems also have complex solutions. Microfinance is one thing that contributes to economic growth, but sometimes, its effect can be negated and bolstered by factors out of the control of those who run microfinance firms. Gender and Sex Inequalities

Women in America are considered to be independent. Most women work, have their own property, and in some cases, even are the heads of their households. The same goes for most of the developed world. The problem here is that in developing nations, women are still, with little hope of the contrary, subjugated to men. Women in developing nations have nowhere near the rights as their developed nation counterparts do. In most Middle Eastern countries, women are still expected to wear veils over their faces, in accordance with the Muslim religion. Furthermore, they are also expected not to work, but to bear children and take care of home. In short, most of the world still has a very traditionalist point of view. This being said, when a woman's husband dies, or leaves her, what is she to do other than to starve? Her children come first, but she barely has enough to feed the eight of them that her husband gave her before his passing. Microfinance has helped women gain more equality to their husbands and to men in general, but the fact of the matter that only when these restricting views are abolished will the chains of poverty start to come off. Once women are allowed to make their own money, they will be able to feed their children, saving the from malnutrition. They will be able to pay for their education, thus setting the children up to make something of themselves. Once women become independent, no longer will they not be able to live with a man by their side. They will be able, all things considered, to sustain their standard of living without falling into the traps of poverty. Power Trip: Political Corruption

This mainly pertains to Africa and it's long, dark history of warring nations. Ever since time began, tribes have been fighting in Africa over land, resources, and money, which could all be considered the same thing. While the heads of these tribes and regimes are eating plentifully, their followers still live in abject poverty, and are food insecure. Also, they are dying at an alarming rate. Yes, that's right. In some African nations, men, women, and children are brutally murdered in the name of politics and power. The shameful part is that microfinance can't stop a bullet.

So how exactly do we counteract the chains of political corruption? A microloan may help a child get an education, but it means nothing if we cannot motivate them to do greater things. Just think about all of the potential Albert Einsteins, Barack Obamas, and Marie Curies out there, growing up in Africa. Now think about the fact that they were either too scared of the politics of government or killed too early to even try and show off their potential.

A main stay of the microfinance movement as well as economic development is to make sure that every child in the developing world is educated with the skills they need to make their living situation better. What purpose do American doctors serve coming to Africa if the children they are healing never get the chance to be great like them? What purpose does a microloan serve when it pays for a child's education that will only end up dying at the age of 15 from a gunshot wound? These are the questions that skeptics of microfinance need to ask themselves. Without the proper learning environment, or the proper environment in general, a child cannot be successful by conventional means. That goes double for a child whose parents never had an education either.

A Deadly Detriment to Economic Growth: Disease
Yes, a few dollars can get you that cough medicine that you need to get rid of that dastardly common cold. A few more dollars, and you can get the vaccine for the flu. A doctor's visit is rarely too costly, but just in case you're running a really high fever, a call to your insurance company can get you to the nearest hospital, where you can get quality care by trained doctors that rarely have too many patients that they can't attend to your needs. Such is the luxury of living in the developed world. At least for the lucky ones. However, if you're that special person who has to choose between your medicine or paying for college tuition, then this may mean something to you.

A huge number of the juvenile deaths in developing nations comes from disease, whether it be HIV, AIDS, malaria, malnutrition, birth defects, or even cancer. What's worse is that in most of these developing nations, they don't have the luxury to pay for, not to mention the convenience of even being close to a research hospital. Consequently, we are presented with the same problem I mentioned before. Children, full of potential and intelligence, dead before their time.

Microfinance can only do so much, but it can cause a domino effect. Say you aren't in reach of a hospital as a poor family in West Africa. You apply for a microloan, and invest in your children's education as well as your farm. In time, your children go from becoming potential HIV infected children to being able to work on a cure for it. Of course, that's an idealist's situation, but also a completely possible one.

The point here is that disease, although completely natural, is responsible for much of the turmoil we see in the developing world. However, food inequality is a big part of this. Most people don't realize how countries like the United States suffer from obesity and heart disease while countries like Indonesia suffer from malnourishment and starvation, which leads into the next detriment from economic growth, development, and sustainability.

Nominal FMF: Free Market Freedom
Ever since the introduction of the free enterprise system, especially on a global scale, the intelligent, innovative, and witty people of the world have amassed fortunes beyond the wildest dreams of even their middle class counterparts in the developed world. They have had the opportunity to be themselves and create something that will ultimately better the world, and make a decent fortune at the same time, with certain government regulations, but not too many as to limit creativity.

Such is the same in all the developed world. People have made fortunes from things that no one else would have made. However, you will notice that most of the Steve Jobses, Bill Gateses, or Mark Zuckerbergs come from the developing world. The answer to that dilemma is quite simple, and it was the first thing you read.

Most businesses in the developing world are agriculture based instead of industry based. However, that is all that they have in terms of business. They grow food, and their economy depends on selling the food to prosper. The cruel irony is that they have been unceremoniously taken out of the free market economy to sell their goods to richer nations. Tariffs and quotas have done their job well, making selling goods on the world market a process that makes pulling teeth look like the easiest thing in the world.

The free market has been that way in name only. The reality is that only those who control most of the free market are actually free in it. Just think if an African country like Sierra Leone traded frequently with the UK? Sierra Leoneans would have more money than they could spend on a regular basis. However, the UK has so many trade barriers set up that Sierra Loeneans cannot afford to trade with them, thus forcing them to trade locally, and limiting their earning potential.

Why would the US and their allies do something like this? Most sources say security. Trading with African nations, especially in the midst of political turmoil could lead to another world war. Also, African nations are not exactly household names. For example, you will usually buy a purse made of Italian leather instead of leather made in South Africa. The biggest motive is money, but what richer nations don't realize is that trading with African nations can actually alleviate some of the problems that they face. When you have an abundance of land and resources, you no longer have a need to fight, and conflicts can be solved diplomatically, more or less.

Microfinance can't sway the decision of a country that has been doing something a certain way for over a century. But what it can do is provide a developing country with not only the money to be able to afford to trade, but the power to take control of their own lives, instead of being pushed back and forth into poverty based on the decisions of a few, powerful nations.

It All Starts Here: Education and Microfinance
If you are reading this book, then you already know the value of a quality education. You know for a fact that without one, you can be stuck in a situation with no hope of getting out of it. Education, or better yet, and abundance of it, can only add to our economy.

Unfortunately, not everyone has access to the same quality education. Even in developed nations, we can see that certain nations have an edge over others, and thus the more educated you are, the better standard of living you can enjoy.

Take America, for example. A high school diploma is much more education than you can get in a developing nation, but in America, the mean salary for a high school graduate only is 38% less than the mean salary for a college graduate, from a study done by the Department of Education's National Center for Education Statistics. Accordingly, based on a study done by the US Bureau of Labor Statistics, there was an unemployment rate of 14.4% among those with only a high school diploma. Among those with a college a degree, the unemployment rate was 7.6%. The irony is that even with a college degree, in America, we still rank below countries like Norway, Sweden, and Japan in terms of education, and accordingly, we have a lower standard of living. The lower you go down the ladder, the worse the standard of living gets.

Let's take a country like Ethiopia. Ethiopia is a third world country on the east coast of Africa, and it is needless to say that they are in need of a better educational system, but for the sake of proof, here are some facts. In the years 2007-2011, a study from UNICEF showed that 82.5% of Ethiopian children who were of age attended primary school. In those same years, the same study showed only 16% of Ethiopian children of age attended secondary school. Translation: only 16% of Ethiopian children went past the sixth grade.

The previous section was aimed at what we need to get rid of in order to promote economic growth, development, and sustainability. Now we focus on what drives those things. Education is the only one worth noting, because the others are only possible when things like disease and political corruption and nominal freedom are no more. While it is not equal among nations, it is to be noted that educational competition sparked outer space travel, one of man's greatest innovations, back when the United Stated and the former USSR were in competition. Maybe that same fire with education will spark a race to end poverty once and for all.

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