Forside - Det Digitale Projektbibliotek, Aalborg Universitet
LIST OF ACRONYMS
CGAP Consultative Group to Assist the Poor
FOSIS Solidarity and Social Investment Fund (Chile)
MFIs Microfinance Institutions
OECD Organization for Economic Co-operation and Development
ROSCA Rotating Savings and Credit Association
USD United States Dollar
1
“The man who moves a mountain begins by carrying away small stones.”
- Confucius, The Analects
1. INTRODUCTION
1 GENERAL INTRODUCTION
In one of the vulnerable poblaciones[1] of Santiago De Chile, Yenny, a 40-year-old head of household, was working as domestic servant. During her free time, apart from spending time with her three children, she used to dedicate herself to her dream: handicrafts. She made looms, tapestries, dream-catchers and pictures with recycled materials that she found on the ground or that people gave her. At the beginning it was just a hobby, but then she decided to transform this passion into her work. She received $100,000 CLP[2] from a microfinance institution and bought some materials. It was the first time she could spend money for her hobby and receive trust from somebody she did not even know. She kept on working as a domestic servant but she dreams to live off her art. She now thinks to be on her way of getting what she wants.
In Chile, the crisis in the 1980s created high levels of unemployment and, consequently, economic and social exclusion. To face this situation, people decided to set up new economic initiatives in order to find a source of household income. Although risky, small economic units were set up by vulnerable people, with a necessity of small loans not worthwhile for the traditional bank (Martinez et al. 2011: 143-144). In these years, various microcredit institutions such as NGOs, banks, cooperatives and foundations, emerged in order to support microenterprises. The difference between them is constituted by the target demand, ways of function, aims and impacts. Nowadays, in Chile there are more than 1,700,000 entrepreneurs – formal and informal- and 75% of them still do not have access to adequate financial services (Martinez et al. 2011: 193-194). Moreover, almost 3 million out of 17 people live below the poverty line: among them, some survive thanks to public subsidies, others manage economic activities and are excluded from the traditional banking systems (Ibid.).
The microcredit experience in Chile took inspiration from the microcredit promoter and winner of the Nobel Peace Prize Muhammad Yunus who opened a financial institution, the Grameen Bank, in order to deliver microloans to poor and “unbanked” people. Starting in the 1970s, microcredit rapidly became the bottom-up approach for “economic development and purposive social change as evidenced by its continuing growth terms of volume, geographical coverage, and influence over social, economic and political processes” (Fernando 2005: 3).
The purpose of microcredit is to reach the bottom of the pyramid, the so-called fourth wagon. Luis Razeto, an Ital-Chilean socio-economist, compares the world economy to a train where the first class is occupied by developed economies, big corporations and affluent people; in the second wagon there are developing countries, medium enterprises, professionals and executives; in the third, there are workers and countries that run the risk to be kicked out of the train; finally, outside this train, there are all the people that are marginalized and excluded by the system (Razeto 2006). Outside the train there are some poor people that survive thanks to public subsidies, while others are creative and talented individuals who need help and support. These people which struggle to get in the train compose the fourth wagon.
During my fieldwork in Chile, I had the opportunity to have direct experiences, then deepened my knowledge and understanding through books and articles. Thanks to my job, I had the possibility to interview clients of microfinance institutions and people that work in the microcredit field such as directors and managers of institutions. Hence, it was possible to enrich my panorama of knowledge about the microfinance world in Chile. From one side, the clients, who have been participating to a microcredit program for more than one year, were witnesses to the impact of microcredit on their lives. On the other hand, people who work for microcredit institution shared their remarkable knowledge about their professional experience. The latter are all part of the Network of Microfinance Institutions[3] that groups all the microfinance institutions whose aim is to eradicate poverty and generate social development. The results obtained through my field work experience, the interviews and the study of theories are condensed in this work of analysis about issues related to the economic and social impact of microcredit on beneficiaries' lives.
2 PROBLEM FORMULATION
In the last decades, the level of poverty and inequality decreased slightly, however Chile still suffers from disparities between rich and poor people (OECD). As a development tool and bottom-up approach, the purpose of microcredit is to alleviate poverty and improve living conditions.
The aim of this social research is to investigate:
how microcredit economically and socially impacts poor people's living conditions in terms of income, family well-being, empowerment and social network.
The research questions that help to answer the main question are:
• Considering the distinction between different types of microcredit institutions, how does microcredit impact poor people's living conditions in terms of income, family well-being, empowerment and social networks?
• How does the neoliberal and solidarity economy approaches explain these impacts on poor people's lives?
• Considering the Solidarity Economy approach, how can microcredit improve the impacts on poor people's living conditions?
3 CLARIFICATION OF TERMS
In this section, some definitions of terms used in this paper will be provided in accordance with the Chilean context:
• Microcredit: “programs [which] extend small loans to very poor people for self-employment projects that generate income, allowing them to care for themselves and their families” (Grameen Bank website).
• Microfinance: I refer to financial services offered to low-income clients by institutions (Niccoli & Presbiterio 2010: 25). In this paper, there is a distinction between microfinance institutions with a minimalist approach and an integrated approach. The first ones, which consist basically in banks and cooperatives, offer individual credit to clients that have businesses already consolidated. The amount of their loans exceed one million CLP[4].Apart from credit, they deliver also other financial services such as credit cards for consumer credit, bank accounts, savings account and so on. Microfinance institutions with an integrated approach offer credit to group of vulnerable people that not necessarily have already a business. These institutions, mainly NGOs and foundations, offer credit and social intermediation services such as business training. The amount of the loans is lower than one million CLP. These groups consist in 10-20 low-income individuals responsible for each other credits ( Ledgerwood 1998: 65-66).
• Microentrepreneurs: Individuals who have self-employment projects, sell less than 57,743,856[5] Chilean Pesos and are close to or below the poverty line (Mendoza 2012: 3).
• Empowerment: “it refers to the expansion in people’s ability to make strategic life choices in a context where this ability was previously denied to them” (Kabeer 2001: 19). In this project, it is used in terms of self-esteem, autonomy in making decisions, vision of the future, participation and leadership.
• Social capital: social relations of individuals considered as a set of resources which they can utilize, together with other resources, in order to better pursue their aims (Pizzorno 1999: 374).
• Well-being: “a state of health, happiness, comfort, and prosperity” (WordReference). In this social research, because of the vagueness of the concept, it will be used in terms of consumption, health, education and savings.
2. METHODOLOGY
This section provides the methodological considerations that characterize this paper. This includes “theories of how, and how far, a research design enables researchers to draw sound inferences to conclusions that offer answers to the research questions and to determine how far hypotheses are supported or undermined” (Perri & Bellamy 2012: 305). In other words, methodology is basically how to acquire knowledge; hence, in this section, after a brief section about the structure of the paper, I will examine in depth the research strategy, research design and the limitations of this research.
1. FIELDWORK EXPERIENCE
Firstly, I will shed some light and importance on my experience in Chile. This research project is based on my internship and, consequently, job that I developed in Santiago De Chile. For nine months I worked in the field monitoring lending groups in the vulnerable areas of Santiago. My participant observation during my work-hours represents an important hallmark since visiting and talking with people incited me to develop curiosity about the popular economy and to write this social research. Indeed, during the job, the possibility to realize social and economic evaluation of clients has led to my involvement in people's business and develop an interest about other aspects of credit, including the social sphere. Moreover, the opportunity to participate in formal meetings with experts in microfinance institutions raised my interest about topics such as the problem of sustainability of microfinance institutions (MFI) and the importance of government recognition of MFIs.
2. RESEARCH STRATEGY
Research strategy, as Bryman (2012: 35) defines, is “a general orientation to the conduct of social research”. According to Bryman, the characteristic distinction between qualitative and quantitative research leads to distinguish “differences in terms of the role of theory, epistemological issues, and ontological concerns” (Ibid.: 37).
1. QUALITATIVE AND QUANTITATIVE APPROACH
The qualitative approach consists mainly in “descriptions, accounts, opinions, feelings” and “is common whenever people are the focus of the study, particularly small groups or individuals, but can also concentrate on more general beliefs or customs” (Walliman 2006: 129). The research methods associated with qualitative research that I employed are (Bryman 2012: 383):
• ethnography and participant observation: for nine months I had been immersed into the social setting of vulnerable poblaciones of Santiago “in order to observe, question, listen and experience the situation in order to gain an understanding of processes and meanings”(Ibid.);
• qualitative interviewing and focus group were conducted in order to gain information about the microfinance world and its impacts on their clients' living conditions.
• Analysis of text and documents, e.g. formal studies on the same case, news and articles, books.
On the other hand, quantitative data are also employed to conduct this social research. This includes, for example, economic growth, trends and indicators of concepts such as poverty and inequality as they “tap concepts that are less directly quantifiable” (Ibid.: 164). Moreover, measures such as personal income, investment in goods and equipment are employed as economic indicators of people's businesses and personal well-being. Nevertheless, all these numbers and figures do not express qualitative information about a phenomenon, hence it is the social researcher's duty to “make them speak” (Kura & Sulaiman 2012: 12).
Therefore, in this paper, a combined method of quantitative and qualitative research– the so-called 'mixed methods research' – is used in order to be “mutually illuminating” (Bryman 2008: 628). In fact, many impact studies on microfinance collect quantitative indicators e.g. coverage and repayment rates, which do not express fully the qualitative improvement of human lives but aggregate data that have to be taken into consideration. Obviously they are not separate, they work jointly to “provide a better understanding of a phenomenon” (Ibid.: 649). Indeed, qualitative and quantitative approaches in social science can be combined in order to understand and to analyze complex subjects such as poverty (Kura & Sulaiman 2012: 13). “The major issue in combining is to note that the quantitative approach is about breadth while the qualitative approach is about depth”. (Ibid.: 15). In my case study, the interviewees combined quantitative data to express the income of their business and qualitative data which to express clients' assessment of improvement. This social research is therefore more heavily based on qualitative data, that is people's assessments, perceptions and feelings.
2. EPISTEMOLOGY AND ONTOLOGY
“Every research tool or procedure is inextricably embedded in commitments to particular versions of the world and to knowing the world” so the inclination to qualitative or quantitative methods should bring about certain epistemological and ontological considerations (Hughes 1990: 10). With regards to epistemology, or “what is (or should be) regarded as acceptable knowledge”, an interpretative approach rather a positivist one should succeed the inclination for qualitative methods (Bryman 2012: 31). In the same way, qualitative research should be related with a constructive ontology, that is “the belief that social phenomena are in constant state of change because they are totally reliant on social interactions as they take place” (Walliman 2006: 15). In regards to positivism, Hughes (1990: 149) asserts, that it is essentially based on observation and taking knowledge of an objective reality that is independent of the social researcher but, on the other hand, “the social world, its topic of inquiry(...) is constructed through meanings and the practices predicated on them” (Hughes 1990: 149). Therefore, in this research, the point of departure is how people view their social situation and how they assess their living standards. In other words, it is based on my interpretation of other people's interpretations. Moreover, the social researcher is not a “passive reporter” but an “active agent in the construction of accounts of the world through the ideas and themes incorporated in forms of knowledge” (Ibid.). Indeed, the researcher brings his/her own unique interpretations of the world because she/he is “inextricably bound into the human situation which she/he is studying and it is necessary to remain open to the attitudes and values of the participants (Walliman 2006: 15-20). In this way, the main preoccupation of the social researcher is trying to see the social world with the eyes of people being studied in order to see the “social reality as a constantly shifting product of perception” (Bryman 2012: 399-400; Walliman 2006: 37). This research is focused on the understanding of human action, how people perceive their social status and its improvements: the perception of how microcredit impacts on their lives is interpreted by them and, at a later stage, interpreted by the social researcher. Categories such as poverty, living standards, family well-being can be treated as social constructions, as the result of interactions between people in constant state of change varying “by both time and place” (Bryman 2012: 34). Nevertheless, people are constrained in an organization characterized by rules and regulations, cultures and subcultures, “that acts and inhibits its members” (Ibid.: 32).
In conclusion, positivism has limitations that an interpretativist methodology could fill and vice versa: “the nature of social research is just as complex as conducting research in the real world. You may discover general tendencies, but they are precisely that – tendencies” (Bryman 2012: 36; Kura & Sulsaiman 2012: 5).
3. DEDUCTIVE – INDUCTIVE
Regarding the process of research, two approaches can be employed: deductive and inductive. According to Bryman's (2012: 70) categorizations, an deductive approach reflects a rationalist approach, while the inductive is related to the empiricist approach. On the one side, inductive research implies the observation of reality and the development of “a statement from a position in which we have no real idea of what might turn out to be plausible, relevant or helpful about the subject of interest” (Perri & Bellamy 2012: 76). On the other side, a deductive way of reasoning consists of a general statement and a series of logical steps in order to verify the theory (Ibid.). In this paper, deductive and inductive ways of reasoning are both employed in order to answer the problem formulation. Indeed, the scientific method
combines inductive and deductive reasoning, resulting in the to-and-from process of developing hypothesis (testable theories) inductively from observations, charting their implications by deduction, and testing them to refine or reject them in the light of the results (Walliman 2006: 18).
Within the inductive and deductive approaches, general and particular, the hypothesis and theories are in a continuous dialogue. In fact, it is difficult and impractical to say which way of reasoning is predominant in this specific case.
In regards to this particular project on microcredit, the observation of reality, general assumptions and critical views on microcredit stimulated the hypothesis. Perri and Bellamy (2012: 76) highlight that “a precise statement of what we expect to find in our observation, given what we think we know, or suspect we know, in advance of doing our research”. The general statement in this research was followed by stages of testing theories through empirical materials and back to theories in a back and forth process.
In conclusion, the categorization of quantitative and qualitative research, to which correspond deductive and inductive way of reasoning, positivist and interpretative epistemology, objective and constructed ontology, is a polarization. In fact “quantitative methods have been used in some qualitative research, and analyses of quantitative and qualitative studies can be carried out using the opposite approaches” (Walliman 2006: 37).
3. RESEARCH DESIGN
The “research design” is “the specification of the way in which data will be created, collected, constructed, analyzed and interpreted to enable the researcher to draw warranted (…) inferences” (Perri & Bellamy 2012: 308). In this paper the research design employed is the case study, which consists of the analysis of the “complexity” and “particular nature” of the case used to answer the problem formulation (Bryman 2012: 66). As case studies are associated with a “location” and call for an “intensive examination of the setting”, this social research is based on field work that lasted for several months in the población of Santiago de Chile (Ibid.: 67). The main critiques to the case study as an empirical inquiry are related to the lack of rigor of the research process and the lack of generalizations from single cases (Yin 2009: 14-15). According to Yin (2009: 16-20), case studies can offer an explanation to experiments, answer “how” and “why” and can be used to “enlighten those situations in which the intervention being evaluated has no clear, single set of outcomes”.
In this research, the unit of analysis consists of Chilean micro-entrepreneurs and clients of a microfinance institution, while the case study is used to investigate the impact of microcredit on their lives considering personal income, family well-being, empowerment and social capital. As Walliman (2006: 46) states, the quality of the investigation of some cases rather than the possibility of making generalizations is the underlying theme of the paper. The case study investigated consists of samples of various small groups and single individuals which, according to some characteristics, can be placed in a “spectrum” in order to compare the different impacts of microcredit on their lives. Regarding the sample, the executives interviewed are representative of the main microfinance institutions and leading figures of the Red para el Desarrollo de la Microfinanza en Chile[6] which groups all the microfinance institutions. Regarding the evaluation of the impact, the population of clients is distributed throughout Chile, i.e. from Arica to Punta Arenas but the sample selected is from different communes of Santiago. In 2013, 255 thousand of people became clients of a microfinance institution; as a matter of fact the sample comprehends 15 cases selected randomly of several microfinance institutions. The selection of the sample is accidental, i.e. “using what is immediately available (…), there are no ways of checking to see if this kind of sample is in any way representative of others of its kind, so the results of the study can be applied only to that sample” (Ibid.: 79). Indeed, the institutions gave me the contact of clients that were requesting a loan during the period between April and May 2014. Then I selected two cases of group lending,[7] clients of two different institutions, Fondo Esperanza and Banigualdad, and five of individual lending, clients of FINAM and BancoEstado. The aim is to evaluate different impacts of microcredit on people and to compare them according to the type of microfinance institution. The population of the clients is quite different in terms of place of origin, income per capita, level of poverty defined by FPS[8], so the sample is not really representative but, in any case, it illustrates and deepen economic and social impacts.
The table 1 summarizes all people who work in microfinance institutions that I interviewed for this social research.
Table 1: Interviewed people who work in microfinance institutions
|Institution |Interviewee |Position |
|BancoEstado |Victor Vera |Advisor to General Management |
|Banigualdad |Felipe Vergara |Commercial Manager |
|Finam |Isabel Infante |Director |
|Fondo Esperanza |Juan Cristobal Romero |General Manager |
|Trabajo Para Un Hermano |Mauricio Rojas |Director |
In table 2 the clients interviewed are here listed together with the institution where of they are borrowers and method of interview. In Annex I, there is more detailed information about the clients such as their age, education and so on.
Table 2: Interviewed clients of MFIs
|Client |Institution |Method of interview |
|Susana |FINAM |Personal communication |
|Paula |FINAM |Personal communication |
|Marcela |Banigualdad |Focus group |
|Gloria |Banigualdad |Focus group |
|Makarena |Banigualdad |Focus group |
|Susana Tuninetti |Banigualdad |Focus group |
|Luisa |Banigualdad |Focus group |
|Maria Eugenia |Banco Estado |Telephone interviewing |
|Lidia |Banco Estado |Telephone interviewing |
|Rosa |Fondo Esperanza |Focus group |
|Elizabeth |Fondo Esperanza |Focus group |
|Hugo |Fondo Esperanza |Focus group |
|Rosa Zapata |Fondo Esperanza |Focus group |
|Veronica |Fondo Esperanza |Focus group |
1. METHODS OF DATA COLLECTION
In order to shed light on the process beneath the social research, primary and secondary data are examined in this section. Primary data are the results of participation in informal gathering and formal meetings, and of interrogations of institutions executives and their clients. Primary data are defined as “the nearest one can get to the truth”, where the phenomenon is experienced directly by the social researcher. On the contrary, they can be also time-consuming and elusive because their interpretation can be influenced by the social researcher's values and beliefs (Walliman 2006: 50). The collection of primary data consisted of face-to-face interviews in the executives' offices and in clients' houses and environment, and by telephone when clients were too busy. Face-to-face interviews are constituted of individual interviews and two focus groups: while the first are more concentrated on a own person's way of understanding the social world, the latter consist of discussions about a particular topic, i.e. the impacts of microcredit on their lives (Ibid.: 98). The phone interviews were recorded through note-taking while all the others were audio-recorded and later transcribed. The interviews are characterized by a flexible format to allow the social researcher “to 'ramble' in order to get insight into the attitudes of the interviewee” (Walliman 2006: 92). The interviews conducted were semi-structured in the two samples. Indeed, with regards to interviews to clients it was important that people could speak about co-related topics in order to not feel bounded or to increase my knowledge about it. In regards to microfinance institutions, the interviews consisted in quite free discussions about topics that I was interested for the social research. Additionally, participant observation, where “the researcher engages fully in the life and activities of the observed, who are aware of his/her observing role”, is a method of collective qualitative data and it was experienced during the work period (Ibid.: 96). Indeed, I conducted my interviews to clients when I was still working and I took advantage of some gatherings or assessments in the field. From one side, they still considered me as a worker, from the other side they demonstrated a lot of interest about the interview.
In regards to the methodology of measuring the impact, I used the so-called before-after based essentially on qualitative data assessed through the interviews before the delivery and after one year from that. The interviews followed a scheme utilized by the FINRURAL[9] about the income and family well-being. In relation to empowerment and social capital, I utilized a survey employed by the microfinance institutions when they evaluate new clients, hence it was possible to compare it with the previous assessments that the organization gave me.
Finally, secondary data - the result of interpretation of primary data – used in this paper are mainly books, newspapers, news, articles and documentaries. Data, i.e. “known facts or things used as basis for inference and reckoning” and also “fleeting and partial glimpse of events, opinions, beliefs or conditions”, are ways of getting closer to reality and understand the social world (Ibid.).
4. LIMITATIONS
Various scholars have conducted studies about microcredit as a development tool and poverty alleviation policy making use of impact assessment (Pitt & Khandker 2003). These studies verify the impact of microcredit on poor people's living conditions through the increase/decrease of household consumption (Roodman & Morduch 2009: 1). However, this research is based on field work to investigate the impact of microcredit on income, family well-being, empowerment and social capital. Time and space are the main limits of this research because I would have liked to develop more deeply some impacts on the social capital and its influence on other factors. For instance, there are various experiences of solidarity in the popular economy that are worthwhile to be mentioned and analyzed. Nevertheless, the purpose of this social research is to give an idea of the extent and the complexity of this world, and, obviously, to raise new questions.
As mentioned before, some limitations are related to the approaches used to evaluate the impacts. Indeed, the sample is not representative but “no sample will be exactly representative of a population” (Walliman 2006: 80). As I will show in the section “case study”, nevertheless the sample respects more or less the characteristics of the represented population. On the other hand, the sample does not include people that failed and were expelled from the microcredit program or people that voluntarily decided to leave it. The reasons can be due to the fact that people started to work as an employee or did not need credit anymore. Furthermore, I interviewed only people from Santiago even if I am speaking about the impact on people in Chile. Even if it would have been interesting to interview people from different areas, especially rural, costs and time represented my limitations. For this project, I assumed that there are more similarities than differences between people from different regions of Chile in terms of income, education, economic activities and so on. Indeed, first of all, 6 million out of 17 of Chileans live in Santiago (World Population Review). Among the regions of Chile, the levels of informality of microentrepreneurs vary from 40 to 50% (Ministerio de Economia, Fomento, Turismo 2013: 7). Even if agriculture and fishing are spread in different areas, nevertheless they are mainly informal and cannot benefit of credit of banks or MFIs with a social mandate which do not offer this type of credit. Moreover, the methodology used by the institutions of microcredit tends to be repeated for all the regions. For all these reasons, I assumed that the interviewees from the area of Santiago could represent Chilean microentrepreneurs in general.
In regards to the method to evaluate the impacts, I chose to use the so-called before-after which presents various limitations such as the impossibility to have a comparison between the individual which received the credit and the one who did not. Indeed, it is impossible to see the impact on people without the credit because this approach would have been time and cost consuming.
Other limitations are attributed to the interviews since different methods were utilized. Indeed, the focus group represented the best way to interview people that are used to work in group. Nevertheless, these interviews are not deep as those conducted through a personal communication. On the other hand, telephone interviews represented the most difficult method because people were quite reluctant to speak on the phone, specifically in personal matters such as self-esteem.
With regards to the bibliographic material, there are not many studies about Latin America and, in particular, about Chile where there is lower poverty compared to other Southern countries. The material available is mainly about Colombia, Peru and Bolivia where the reality of microfinance is more developed in terms of services delivered to the clients and studies on impacts.
Furthermore, another limit that I would like to highlight is due to my participant observation. The language and culture can represent a limitation when the social researcher conducts her/his interviews because some terms utilized by people are related to social and cultural constructions. Another limitation is due to the translations carried out during this paper. There is always a chance for misinterpretation when reading the interviews.
3. THEORETICAL AND CONCEPTUAL FRAMEWORK
In order to investigate the impact of microcredit, concepts and theories will be employed as they “provide a framework within which social phenomena can be understood and the research findings can be interpreted” (Bryman 2012: 20). A definition of theory as “the abstract statements that make claims about the world and how it works” (Walliman 2006: 60) constitutes the backdrop of the social research in combination with concepts. Walliman (2006: 6) further elaborates that “the building blocks of the theory are usually abstract and cannot be directly measured”, and therefore concepts are used to complement the theory. In this section, the concepts of poverty, inequality, informal economy and development will be illustrated in a way that “everyone reading the work has got the same idea of what is meant” (Ibid.: 61). Finally, through the theoretical approaches of neoliberalism and solidarity economy, microcredit will be illustrated.
1. CHOICE OF THEORETICAL APPROACHES
I chose the theoretical approaches of neoliberalism and solidairty economy that function as a backdrop of my social research. The differentiation realized by some books among MFIs led me to think the approach utilized in the light of theories. I could read that microcredit was associated to a neoliberal tool based on the personal struggle of the individual. On the other hand, during an interview, I had the possibility to listen some information about Solidarity Economy. The choice is due to the fact that these two approaches show different points of view about what poverty is and how to face it. I took into consideration also other theories such as those about human needs of Max-Neef. Nevertheless, I decided to develop more the concept of solidarity which I started to notice in people's behaviors during my work.
2. POVERTY AND INEQUALITY
The following section aims to define poverty and inequality as the starting point of this social research. In order to do so, first, historical and current trends will be highlighted; furthermore, a definition of poverty and inequality will be provided in order to share a common understanding. Finally, two approaches of poverty will be presented.
1. HISTORICAL AND CURRENT TRENDS
After the Second World War, according to the neoliberal argument, the world witnessed a dramatic economic growth and positive trends such as a fall in poverty and inequality. During the 1980s, phenomena such as globalization of the world economy and the implementation of free-market policies increased the level of prosperity on a global level (Wade 2011: 375-376). According to Martin Wolf[10], globalization as global economic integration is the engine of development and the liberalization of markets as a solution for issues such as poverty and inequality (Wolf & Wade 2002). The necessity to open the markets, impose neoliberal policies and to integrate into the global economy represented the solution for improving issues such as poverty and inequality. Nevertheless, the anti-neoliberal argument expresses its criticism against globalization and neoliberal policies. Indeed, the stated improvements of growth and the reduction in poverty and inequality on a global level were criticized not only in developing countries but also in the developed ones (Wade 2011: 376). Nowadays, even the World Bank, who is a supporter and promoter of neoliberal policies, declares that although poverty globally decreased in the last three decades, “rising inequality and social exclusion seems to accompany rising prosperity in many countries” (Chandra 2013). Ignoring for a moment the data related to the level of poverty and inequality, there is a quite widespread consensus that poverty and inequality are still current issues. On the other hand, it is not just a matter of quantitative trends related to economic indexes such as income, but also of new qualitative aspects that poverty assumes nowadays.
For the purpose of this paper, I employ Razeto’s classification of poverty although I acknowledge that there are many other authors and viewpoints on how to classify poverty. According to Razeto, there are two types of poverty which characterize a society: the residual and the transitional. The first can be considered as structural poverty where people reside for a long period of time and are basically “trapped into poverty” (Chronic Poverty Research Center website). These people live below the poverty line, suffer various deprivations, and, without interventions, will be likely poor also in the future (Ibid.). According to Razeto, whose focus is on developing countries especially in Latin America, this type of poverty has its roots in the re-arrangement of economy and of the social structure in the 1980s. Indeed, certain categories of people such as indigenous, farmers and artisans, attracted by the job offers of the modern sector of the towns, left their traditional way of living. Nevertheless, some of them could not integrate into the private sector because they could not utilize their skills but also because of the demographic boom and the process of urbanization (Razeto 2006).
The other type of poverty called transitional or short-term poverty consists of people “who move in and out of poverty, or only occasionally fall below the poverty line” (Chronic Poverty Research Center website). Razeto defines the transitional as all of those people who reach to get in the train, i.e. who are part of the formal workforce and consumers in the market economy, and then are excluded from it throughout unemployment, underemployment and loss of social assistance (Razeto 2006). On the other hand, people that are transitionally poor – even if it is not clear how much time is considered “transitional” - own more instruments compared to people that are chronically poor. In the empirical part, these concepts will be related with the case of Chile and the case study. Nevertheless, after having analyzed the trends of poverty, in the next section a definition will be provided.
2. DEFINITION F POVERTY AND INEQUALITY
The debate on the improvement of poverty levels and inequality highlights the importance to define the concepts of inequality and poverty. With respect to inequality, in few words, it can be defined as “an indicator of how material resources are distributed across society” (OECD 2011: 66). The causes of inequality of income can be endogenous or exogenous. The first can “be best referred to a set of circumstances or characteristics intrinsic to individuals”, e.g. the personality, which can be influenced by the social and cultural environment, or physical differences such as the gender (Charles-Coll 2011: 18-19). Exogenous factors can be education, land distribution, immigration, economic crisis and globalization (Ibid.: 20). With regards to education, “a society with a poor access to education could find itself in a situation in which the few who could obtain education and acquire skills will allocate in working positions that offer high salaries” (Ibid.). Hence, inequality can be dangerous for a society because it leads to discontent in the society together with poverty (Ibid.).
In terms of defining poverty, there are different definitions from various institutions and scholars that correspond to two different approaches: the mainstream and the critical alternative. The mainstream approach includes all the definitions that see poverty as “unfilled material needs such as food, clean water, sanitation and as an economic condition dependent on cash transaction in the market-place for its eradication” (Thomas 2008: 472). According to this view, poverty is measured in monetary terms and is seen as dissatisfaction of basic needs. Hence, “economic growth is identified as necessary for combating poverty” because the wealth produced at the top consequently will reach the bottom thanks to trickle-down effects (Ibid.: 473). For the purpose of this social research, this economic definition of poverty is not sufficient as it only stresses the importance of money. Hence, other definitions, which consider poverty in a more holistic way, are more complete because they highlight other aspects of pauperism.
The critical alternative approach conceives poverty not only as unfilled material needs but also based on “spiritual values, community ties and availability of common resources” (Ibid. 472). In this way, poverty is identified as the inability “to provide for the material needs of oneself and one's family by subsistence or cash transactions, and by the absence of an environment conducive to human well-being broadly conceived in spiritual and community terms” (Ibid.: 473). Hence, while the mainstream approach focuses on material needs, the second adds non-material needs which permit the individual and his family to reach a state of well-being. In spite of several definitions of poverty, I choose to focus on Max Neef's concept, which is
The traditional concept of poverty is limited and restricted, since it refers exclusively to the predicaments of people who may be classified below a certain income threshold. This concept is strictly economist. It is suggested here that we should speak not of poverty, but of poverties. In fact, any fundamental human need that is not adequately satisfied, reveals a human poverty. Some examples are: poverty of subsistence (due to insufficient income, food, shelter, etc.), of protection (due to bad health systems, violence, arms race, etc.), of affection (due to authoritarianism, oppression, exploitative relations with the natural environment, etc.), of understanding (due to poor quality of education), of participation (due to marginalization of and discrimination against women, children and minorities), of identity (due to imposition of alien values upon local and regional cultures, forced migration, political exile, etc.) (Max -Neef 1992: 200).
The employment of this definition is to show the complexity and the multidimensionality of poverty, which cannot be reduced only to material needs. For the purpose of this social research, I will not go deeper into this concept but I will make use of some categories during my analysis.
3. INDICATORS OF POVERTY AND INEQUALITY
As seen from the two above-mentioned approaches, poverty and inequality are complex and involve debated concepts that need indicators to be grasped but which can provide just a partial idea of the phenomenon. The mainstream approaches use more quantitative measures and indicators. For example, the World Bank measures poverty through the indicator of the incidence of poverty i.e. how many people live below the poverty line. Nevertheless the numbers do not catch the multidimensional dimension of poverty (Wade 2011: 383-388). On the other hand the critical alternative approach considers other dimensions in a more integrated way e.g. taking into consideration nature, common resources, empowerment (Thomas 2008: 473). Similarly, about inequality, there are different indicators such as the income share held by the highest and the lowest 20% in order to grasp the breadth of difference (World Bank Data website). Notwithstanding, it is important to bear in mind the multi-dimensionality of poverty and inequality, which starts with the economic dimension and goes beyond that.
To conclude this section, the concepts of poverty and inequality are complex and the boundaries of their definitions are quite blurred. In spite of this, even if the trends are not clear, institutions such as the World Bank, NGOs and governments consider that poverty and inequality are still challenges. In my analysis these considerations influence the way to conceive these issues and the necessity to go beyond mere data and consider the multi-dimensionality of these phenomena in the context of my case study. In the analysis, the complexity of poverty and inequality will be represented through a multi-dimensional look at the case study. In continuation, development will be presented in order to show how there are different approaches to poverty and inequality.
3. DEVELOPMENT: NEOLIBERALISM AND ALTERNATIVE APPROACHES
In response to different conceptualizations of poverty, the concept of development, “conceived only within an ideological framework” and reflecting “a particular set of social and political values”, presents multiple meanings and understandings (Thomas 2008: 473). From the 1950s to nowadays, different definitions and approaches on development have emerged in response to more and more problematic and complex issues within it, such as poverty and inequality. “How development is conceived, how development process should be understood to work and how development might be achieved” is still a matter of discussion (Phillips 2011: 416-419). Therefore, I will introduce two different approaches, namely neoliberalism and critical alternative, to try to understand and highlight the complexity of development.
1. NEOLIBERALISM APPROACH TO DEVELOPMENT
During the 1970s, neoliberalism became politically and economically the ruling ideology based on the cornerstone that “human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within an institutional framework characterized by strong private property rights, free markets, and free trade” (David Harvey in Phillips 2011: 423). Based on neoclassical economics, the market is populated by rational and self-interested individuals who act in order to maximize their utility. Hence, market-led mechanisms, liberated by the distortions of public policies, represent the “pre-requisite of development” because markets are efficient in its use of resources and reward depending on productivity of individuals (Chang 2010: 2; 15). In this way, the “treatment” for poverty is the further integration in the global economy through trade liberation, and later wealth, thanks to the “trickle-down” effect, will move to poor people’s hands (Thomas 2008: 477). Nevertheless, free-market policies have only made a few countries rich so far and most likely, only a few in the future (Chang 2010: 2;15). These policies are not the solution for all “social evils” which affect members of a society. Therefore, a more holistic approach is necessary in accordance with the multi-dimensionality of poverty and inequality.
2. CRITICAL ALTERNATIVE APPROACH TO DEVELOPMENT
For the last three decades, wealth, generated by process of liberalization and integration, did not have the expected trickle-down effects with respect to poor people in developing countries (Chandra 2013). In fact, the polarization of wealth created a bigger gap between a mass of poor and a small group of wealthy people. This inequality is not “regarded as a problem, so long as the social and political discontent which inequality engenders is not so extensive as potentially to de-rail implementation of the liberalization project itself” (Ibid.: 477).
As has been argued by opponents to neoliberal development strategies, there has been a failure in the success of development programs. Accordingly, various NGOs, foundations and social movements have conceptualized an alternative conception of development, which started to flourish since the 1970s. The main argument is the need of new endogenous processes of development which utilize the internal resources in order to satisfy both material and non-material needs (Ibid.: 479). This process has to occur with respect to the environment and with re-taking control of their local communities (Ibid.: 479). Damaged by the globalization process and its inequity, that mass of people, dis-empowered and dominated, will take the control of their life. New aspects of development emerged such as sustainability and the importance of intra- and inter- generational equity, environmental impact,
gender integration, and attention to indigenous people.
Nevertheless, the critique to the liberal system is not a recent subject started with the alternative approaches in the 1970s. In fact, during the 1940s, Karl Polanyi[11], through his use of a multi-disciplinary approach, criticizes market societies. In this part I will employ Karl Polanyi's concepts of reciprocity and counter movement in order to show his influence in the conceptualization of movements that go under the name of Solidarity Economy, which will be the next section.
According to Polanyi, the economy is “a instituted process of interaction between man and his environment, with results in a continuous supply of want satisfying material means” (Granovetter & Swedberg 2001). In this definition, contains the concept of “embeddedness”, that is economic systems are embedded in social relations. Through his anthropological studies, in the economic systems Polanyi identifies three forms of integration between society and the economy when the market has not yet prevailed (Polanyi 1944: 47). These three forms of integration can coexist but, as we will see later, the dominance of one or another system, can lead to a disequilibrium. Firstly, reciprocity is based on symmetrical exchanges of goods and services within the family and kinship (Ibid.) In other words, it is a matter of give-and-take among individuals whose relations are based on trust. Secondly, redistribution is based on the “centricity” of a dominant authority that collects goods and services and, consequently, redistributes them among the community (Ibid.). Finally, market exchange is a system of allocating resources based on price and peripheral in the societies studied by Polanyi until mercantilism (Ibid.). After the Industrial Revolution, the market exchange began to prevail over the other two forms of integration. In the 21st century, the power of self-adjustment of the markets entailed a transformation towards the so- called “Market Society”. Indeed, in Polanyi's words,
the idea of a self-adjusting market implied a stark Utopia. Such an institution could not exist for any length of time without annihilating the human and nature substance of society; it would have physically destroy man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself, but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet another way (Polanyi 1944: 3-4).
In other words, the dominance of the market over the other forms leads to the “disembeddedness” of the economy from social relations. As a matter of fact, the self-regulating market does not need the interference of any other institution, and now the market economy embeds social relations on the contrary to before. (Ibid.: 57). The effects are destructive because the logic of utilitarianism and profit maximization replace the forms of reciprocity and redistribution (Ibid.: 33). Hence, man and nature, which are essential parts of the process of production, are also absorbed in the market system and give them a price. Nevertheless, with the expansion of the market, a “counter movement” emerged to protect the society, “a reaction against a dislocation which attacked the fabric of society, and which would have destroyed the very organization of production that the market had called into being” (Ibid.: 130). The counter movement consisted in different political and institutional forms such as fascism, communism, the New Deal and so on, which consisted in “checking the action of the market in respect to the factors of production, labor and land. This was the main function of interventionism” (Ibid.: 131-145).
The logic of individualism, profit maximization, and utilitarianism due to the dominance of the market compared to the other two spheres shows the disequilibrium among state, society and market. Liberalism and neoliberalism run into a contradiction because they destroy the society, which needs to be rebuilt through a counter movement. The latter consists in a way to defend the society from the self destruction (Coraggio 2014: 20-21). In this panorama of counter-movements, I chose to sustain the analysis with the solidarity economy approach. In spite of its limitation that will be illustrated later, in my opinion it represents an adequate way to bring back the equilibrium between the three forms of integration. The aim of the solidarity economy is to overcome the individualistic and utilitarian conception and replace it with the recognition of the social nature of the human being and of the forms in which he performs his action.
3. SOLIDARITY ECONOMY
The solidarity economy is a movement which initially emerged in Latin America as a reaction against neoliberal policies of authoritarian regimes and then spread worldwide through the diffusion of activities that share some characteristics. Nevertheless, it is difficult to make a definition that includes all manifestations. Therefore, the solution utilized in this social research is to leave it open. Indeed, the definition below tries to grasp this elusive concept considering the multiplicity of practices in the world:
Solidarity economy designates all production, distribution and consumption activities that contribute to the democratization of the economy based on citizen commitments both at a local and global level. It is carried out in various forms, in all continents. It covers different forms of organization that the population uses to create its own means of work or to have access to qualitative goods and services, in a dynamics of reciprocity and solidarity which links individual interests to the collective interest. In this sense, solidarity economy is not a sector of the economy, but an overall approach that includes initiatives in most sectors of the economy (Allard & Davidson 2008: 6).
To further develop the abovementioned, the solidarity economy includes all the economic alternatives which emerge from the civil society whose focus is the humankind as individual and social being (Ibid.: 4-6). The aim of these initiatives is not only economic gains but also social benefits, e.g. in terms of relations. As highlighted by Polanyi, these economic alternatives, which exist “in the belly of the neoliberal market economy”, place in the center different types of relationships with respect to those of the market economy and “involve varying degrees of cooperation, association and solidarity” (Utting et al. 2014). Indeed, the aim of these practices is to embed the economy in the social relations that is to bring back the importance of recognition of identity of people which participate in the exchange. In this way, the exchanges are not anonymous anymore but charged with identities. Additionally, profits and utility are replaced with other types of wealth and values which are not necessarily related to money but concern relationships between human being and the Nature. In regards to the latter, people are “co-users of natural resources and co-responsible for the conservation of Nature” (Arruda in Allard & Davidson 2008: 4). This multiplicity of economic alternatives “already planted seeds of a new economy, an economy of cooperation, equality, diversity, and self-determination: a solidarity economy” (Miller in Allard & Davidson 2006: 7).
In order to have a more empirical understanding, here are mentioned some practices that go under the name of solidarity economy. According to Miller[12](2005: no page), “these are our economies, people’s economies, the economies that we build with our everyday lives and relationships”.
He lists some experiences such as gift economies i.e. giving resources to other people with a timeless consideration, barter economies based on trade between neighbors and friends, and collective economies which consist in the ownership and control of resources (Ibid.). Furthermore, Luis Razeto adds that solidarity economy offers alternatives not only for people of the collective society but also to other levels, that is the market and the state (Razeto n.d.). Indeed, businesses that incorporate social and ethical aims, and public institutions which recognize the importance of solidarity economy are included in this indefinable category.
To conclude, these practices, which emerge in different parts of the world, at a local and global level, conceive an economy at the service of people that is embedded again in the society. As highlighted throughout this section, these practices that go under the name of Solidarity Economy represent a form of equilibrium between the three forms of integration, that is reciprocity, market exchange and redistribution. In the next section, the Popular Economy as a segment within the market economy will be presented in order to show the popular reality and its relationship of solidarity.
1. Popular Economy
The necessity to survive and meet the basic needs of people, which have been socially and economically marginalized from the modern life, entails the establishment of a heterogeneous variety of economic activities. The increase of these activities results in an inflation of what Razeto calls the “popular economy” (Razeto 2006.: 15). We call “Popular Economy” all the economic activities and social practices developed by the popular sectors with the aim to satisfy material and non-material needs through the employment of their work and available resources” (Icasa & Tiribia 2003: 173). The majority of these activities are also part of what is called the informal economy that is “the collection of unregistered firms which do not pay taxes or observe laws, including those providing job security” (Chang 2010: 19). Nevertheless, it is not necessarily that these two concepts overlap because there are several experiences of popular economy where the microentrepreneur is registered and, consequently, taxed as we will see in the case study. In spite of this, in this part, I will use the two terms indiscriminately and according to the author’s choice. The concept of the “informal economy” became part of development studies since the 1970s when the phenomenon of “urban, informal, unstructured economic activities (…) allowed masses migrants to survive in Third World metropoles: small street businesses, production, service workshops and so on” (Nyssens 1997: 173).
According to Razeto (1993: 13), the reasons for the emergence of popular economy are due to the structure and to international competition. Indeed, small local enterprises are excluded from the formal market because they cannot stand the competition with foreign enterprise. Moreover, continuous technological innovations modify work requirements, shrinking the pool of available jobs (Ibid.). For these reasons, just some sectors and actors take advantage of the modern economic competition, therefore excluding from the system individuals and enterprises which are not enough efficient to compete (Ibid.: 13-14). Additionally, following the introduction of neoliberal policies, in order to reduce public spending, the distributive role of the state was reshaped, causing the inability to provide for social services to new unemployed workers (Razeto 2006: 14; Chang 2010: 19). In spite of the exclusion and marginalization of people, in order to not remain “outside” the process of modernization, developing countries struggle to be updated in a continuous process of “catching up” to developed economies (Ibid.: 12-13). On the other hand, the informal economy cannot be ignored as a marginal phenomenon. “The plurality of modes of organization which are intermeshed in socio-economic life” has resisted for centuries and represents an “active economic subject (Nyssens 1997: 171-177).
In a theoretical viewpoint, the Popular Economy becomes a promoter of development with its mode of socio-economic organization and a challenge to market-state synergy (Ibid.: 182). On one side, from a liberal point of view, popular economy represents the “ideal realization of perfect competition” because there are no barriers imposed by the state e.g. entry barriers and protection for workers. Indeed, in the popular economy, the perfect competition rules and people look for the profit maximization. Nevertheless, as discussed above, it is not a transitional phenomenon ready for a process of modernization, rather these modes of production “offer alternatives to mass production and are embedded in dense social networks in some regions (Ibid.: 185). Hence, according to the Solidarity Economy approach, they represent economic alternatives in the market economy, and as well promote development. Indeed, bringing back the Polanyi's forms of integration, these economic alternatives embedded in social relations constitute a hybrid between these “poles” as Nyssens call them.
Illustration 1: the three poles
[pic]
Source: Nyssens 1997: 187
In illustration 1, the three forms already seen in the Polanyi's theory are shown and briefly explained. As showed in the illustration, Nyssens (1997: 187-188) explains that economic organization can be seen as structured on these three poles. Firstly, the capitalist pole is constituted by market exchanges, competitive relations between individuals and exploitation of nature with the aim of the maximization of profits. Secondly, the public pole consists of relationships dominated by central authority and subsidiary relations with individuals. Thirdly, the community pole is based on human factors (labor factor), which are relationships characterized by reciprocity and the common ownership (Ibid.). In the popular economy, these modes of organization represent a hybrid between these three poles. As a matter of fact, the practices in the popular economy present characteristics that are common to the market logic and the community pole, and they rely on the state intervention. Therefore, as said before, these activities are embedded in social relations because people in the popular economy share the same identity of poblador[13] but, at the same time, they can also develop more competitive relationships with other businesses. While there are forms of common ownership, for instance when more people work together in a microenterprise, nevertheless, there are many cases of individual ownership (Ibid.). Moreover, the popular economy cannot live outside the synergy market-state; in fact there is cooperation with these two institutions. Indeed, these economic alternatives recognize the importance of a “partner state. Through subcontracting and competition, the market sector is directly interrelated with the popular economy creating useful bonds (Nyssens 1997: 190-191). On the other hand, the state can recognize their socio-economic role and support local initiatives in order to ameliorate individual and communities conditions (Ibid.). The recognition from the political system of a reality which consists in not only a “source of employment” but also “of social cohesion” could incite popular economy to be an active agent of development (Ibid.: 193-194). Indeed, as said before, getting back Polanyi's concepts, these socio-economic modes of production can be considered as a hybrid between the three poles: state, market and community. This equilibrium condition can bring about changes not only at a local but also at a global level in a possible future. Indeed, a bottom up grassroots counter movement can rise from the popular economy and influence the market economy from within.
Nevertheless, the panorama of experiences in the popular economy is various and not all of them have an intrinsic equilibrium between the three poles. According to Razeto (1993: 11), these modes of production include “a variety of experiences” e.g. independent economic activities with small scale production and commercialization mainly in the house or the street, a microenterprise managed by an individual, a family or two or more partners, and “popular economic organizations”. The latter consists of “small groups or organizations of people and families who manage together their scarce recourses to develop, in terms of cooperation and mutual help, activities which generate income or provide goods and services which satisfy basic needs of job, food supply, health, education, housing and so on” (Razeto 1993: 11). As Razeto writes (1993: 15), Popular Economic Organizations - Organizaciones Econòmicas Popular (OEP) can be potential subjects and agents of the creation of a solidarity economy. Secondly, they can lead a social organization in the popular economy. The common characteristics of these organizations are (Ibid.):
1. their popular origins among poor and marginalized people;
2. they are “personalized organizations” i.e. small groups of individualities (Ibid.);
3. they are technically organized with a objective, an organization of recourses, planning of activities.
4. they are economic organizations even if they organize also social activities;
5. they are directly involved in solving problems of their members through mutual help and self-development;
6. relations between members and values are characterized by solidarity i.e. cooperation, trust and community;
7. they are “participative, democratic, self-managed, autonomous” (Ibid);
8. they combine economic, social, educational, personal and group development activities including political and religious action;
9. they act in a different and alternative way compared to the capitalist and individualist form in order to contribute to social change;
10. they are horizontally integrated through connections and network, and vertically with NGOs and public institutions.
Several benefits are related to cooperation e.g. better prices of supplies and learning new methods of production, that can be extended to the popular economy creating “a sector of solidarity economy” that could positively influence the national economy with its values, creativity and dynamism (Ibid.: 17). In conclusion, all these practices aim to transform the popular economy into solidarity economy in order to alleviate poverty (Ibid.). Therefore, economic initiatives which aim to satisfy economic and social needs are called by Razeto (2006) “Popular Economic Organizations” and they represent an equilibrium between the three poles. Indeed, at the center there is a group of individuals characterized by clear identities and relationships based on cooperation, reciprocity and solidarity. These organizations utilize the local resources in order to satisfy not only economic but also social needs of people in the group. Moreover, they are horizontally but also vertically linked with other organizations. Hence, these forms represent the hybrid of the poles and can be identified as one of the promoter of development and influence the structure of the market economy.
To conclude this section about theories, different conceptions of poverty lead to various interpretations of development influenced by the political and economic context. The critique to the neoliberal approach to development led to the appearance of alternative approaches which consider development in a more holistic way. One of them is the Solidarity Economy, a set of practices whose aim is to satisfy not only economic but also social needs. These initiatives can be found in the popular economy where there is a market logic but within a social context. In the next section microcredit will be presented as an instrument that can promote these types of initiatives.
4. MICROCREDIT
In this section I will present briefly microcredit as a development tool that promotes economic and social development. This will be followed by a critique that will be utilized in the analytical section.
In spite of its ancient origins, the modern conceptualization of microcredit dates back to the experience of the Grameen Bank instituted by Muhammad Yunus[14] during the 1980s. Microcredit, as said in the introduction, is a small loan that poor people invest on their income generating activities in order to be able to face personal and familiar needs. Implemented in Bangladesh, this instrument was subjected to rapid diffusion in other developing countries thanks to the support of the international development community. The culminating moment was represented with the award of the Nobel Peace Prize to Yunus and the Grameen Bank for “their efforts to create economic and social development from below” (Grameen Bank website). Observing the context of poverty which characterized the country, Yunus noticed that poor people used to strive to face their needs through the use of their personal abilities and social capital (Becchetti 2008: 10). Nevertheless, these people depend extensively on local moneylenders which were the only ones who used to lend money to them. Hence, the idea to institute a bank that could lend money to poor people considered “unbankable” represented a revolution for development programs (Ibid.).
Studies on improvements of income and consumption conducted during the 1990s reinforced the importance of microcredit as a development tool (Roodman & Morduch 2009: 1). On the other hand, beyond the material results at a personal and familiar level in terms of income and consumption, diverse benefits are associated with microcredit. First of all, there are benefits relating to trust. Indeed, a credit offered to people that are socially and economically marginalized can generate improvements at a personal level because the institution support and encourage the individual (Becchetti 2010: 65). Moreover, several studies demonstrated positive effects on empowerment, especially for women, in terms of autonomy of taking decision, active participation in the community, self-esteem (Becchetti 2010: 63). Other benefits are related to the methodology of village banks[15] with respect to the individual credit. Indeed, the guarantees of the traditional banking systems are replaced by the moral collateral, that is the responsibility of the members for each other credits (Grameen Bank website). This methodology has also the aim to promote cooperation and solidarity between people in the group improving the social capital. In this way, the social relations also lead to positive benefits a a personal, familiar and communitarian level in a virtuous circle. Therefore, microcredit as an instrument of social and economic development has effects that go beyond the material results, but influences also the empowerment and social capital which in turn generate positive changes.
1. CRITIQUE TO MICROCREDIT
In spite of the spread of microcredit in the world, not only in developing but also in developed countries, a harsh critique threatens the basis whereon microcredit is built. First of all, according to scholars such as Bateman and Chang, the Grameen model based on a poverty-lending approach was substituted by a financial systems approach due to the commercialization of microcredit. (Bateman 2010.). Indeed, during the 1990s, the dominance of neoliberal ideology entailed changes to the way how microfinance institutions worked. The new wave of microcredit entailed that NGOs were substituted by commercial banks, low interest rates by high interest rates, and the aim to help poor people by the maximization of profits (Ibid.). Microfinance institutions that before were subsidized by the state were obliged to adapt to the idea of “earning their keep on the market” (Ibid.). In this way, the logic of microcredit to help people to get out of poverty was replaced by pure economic interests which consider credit a source of gain.
In Bateman's opinion, nowadays microfinance is built on myths of the past before the commercialization of microfinance destroyed the system (Ibid.: 9). These myths are briefly outlined because they will be part of the analysis. One of the myths related to microcredit is the fact that loans are not used to be invested in income-generating activities but rather to facilitate consumption of the individual and the family (Bateman 2010: 10). Loans, because of their small amount, support the consumption leading to greater levels of poverty (Ibid.). Another myth is related to the positive impact of microcredit on empowerment. Indeed, according to Bateman (Ibid.: 14) microcredit leads people to accept working conditions and salaries lower than those offered by salaried jobs (Ibid.: 14). Other critiques are related to the impact assessments realized in the 1990s which have been revised during 2000s showing undefined results (Roodman & Morduch 2009: 39-41). According to these analyses, income and consumption do not seem to have a clear link with microcredit and even less between microcredit and reduction of poverty (Niccoli & Presbiterio 2010: 70). Even the CGAP, a global partnership whose aim is the financial inclusion of poor people,declares that:
If the case for microfinance depended on whether it was lifting people out of poverty, then the appropriate response right now would probably be to declare a moratorium on support for microfinance until further research clarifies this question more (Rosenberg 2009).
The stress on individual entrepreneurial activity, no state intervention and social welfare programs, “flexibilization” and disempowerment of the labor market, leads to conclude that microcredit is a vehicle of neoliberalism (Ibid.: 24-25). Microcredit permits that poor people can obtain the control on their life and purchase social services such as healthcare and education (Bateman & Chang 2009: 26-27). In this way, there is no necessity of the re-distributive role of the state because microcredit will lead poor people to buy what they need on their own. Microcredit “is based on an attractive but false premise that poor people can make themselves richer providing they have access to credit. But wealth creation, outside of fairytales, is very rarely the result of individual effort. Rather it is a collective endeavour – requiring skills and knowledge – in institutions such as companies, co-operatives” (Bunting 2011).
To conclude, microcredit, in its original conceptualization, promotes economic and social development for poor people in terms of income, empowerment and social capital. On the other hand, a critique seems to consider microcredit as a neoliberal vehicle with dibatable effects on poor people's living conditions.
4. CHILE AND MICROFINANCE
In this section, an historical section about Chile in the last three decades will introduce issues such as poverty and inequality. Then, economic initiatives in the popular economy will be followed by the presentation of microfinance institutions.
1. HISTORY OF CHILE
In this section, a brief history of Chile will be illustrated in order to introduce issues such as poverty, inequality and popular economy.
The frustration for free-market capitalism which ruled the country before 1970 lead to the victory of the socialist Popular Unity party, headed by Salvador Allende. This represented the “unique experiment in making a socialist revolution by constitutional means” (Williamson 2009: 505). During his three years of government, Allende started a process of nationalization: the copper-mines, the telephone, the telegraph company and banking (Klein 2007: 13). Beyond nationalization, the socialist government struggled to realize a land reform which consisted in the redistribution of the estates to small farms and cooperatives (Williamson.: 501-502). As showed in the graph 1, the annual GDP increased slightly during the first two years of the socialist government of Salvador Allende but, in the next two, the variation was negative.
In 1973, a coup d'etat overturned the social government leading to the neoliberal period. Once in power, General Pinochet pushed for an “ideological revolution” in order to bring order into the “chaotic” situation created by the socialist policies. First of all, it was necessary to extirpate socialism and replace it with free-market capitalism (Williamson 2009: 506). The implementation of neoliberalism policies consisted in free trade policies, privatizations of the public sector and fiscal discipline (Williamson 2003: 505). During the process of implementing the neoliberal policies, the OPEC oil crisis erupted and the GDP of Chile declined dramatically in 1975 (Ibid.: 506). The following years showed positive trends with an increase of economic growth, the fall of inflation and the recovery of exports. However, it increased the level of unemployment and inequality (Ibid.: 506-507). As a matter of fact, the neoliberal policies created discontent among different social classes, especially among poor people who could not afford their previous lives (Klein 2007: 15-16%). The world recession from 1982 to 1984 created a deficit in the balance of payment due to high rate of exchange, extreme quantity of private borrowing to foreign banks and few productive investments. This provoked not only a financial crisis but also the nationalization of the foreign debt giving “the collective responsibility of the people of Chile to pay off the mountain of credit amassed by the privileged conglomerates during the boom of the late 1970s” (Williamson 2009: 507). Nevertheless, in the second half of the 1980s, the Chilean economy started the recovery: increase of economic growth through export-led policies, decrease of the foreign debt led to declare that neoliberal policies reached their success (Ibid.: 509). Although this may be true, as demonstrated in graph 1, the levels of poverty and inequality got worse during these years leaving a consistent part of the population “outside” the “economic miracle” (Ibid.).
Since the 1990s until 2000s, the party Concertacion por la Democracia which grouped the Christian Democrats, Socialist and various left parties, ruled the country. Firstly, Patricio Aylwin, president of the government, decided to combine free-market policies with measures to reduce poverty and inequality (Williamson 2009: 578). Then, the socialist Ricardo Lagos was elected president in 2000s almost maintained the same economic policy but with a greater attention for the poor sectors through a social welfare scheme. Moreover, he introduced a divorce law and permitted the trials against the armed force for violations of human rights (Ibid.: 579). In 2005, the Concertacion, headed by Michelle Bachelet, won the elections changing the rules of the usual game: she was a woman and also a member of the socialist party (Ibid.). During her government, she faced the discontent of students and problems related to public transport which penalized her in the next presidential elections (Ibid.). Indeed, in 2009, after 20 years of left wing rule, the Alliance for Chile, headed by the rightist Sebastian Piñera won the elections. Criticized for his populist social measures similar to those of the previous government regarding maternity leave and the free health insurance for retired people belonging to low social classes, his government was characterized by economic growth and low unemployment (Cabalin 2011). Nevertheless, protests and strikes in Chile during his mandate demonstrate that other issues are getting more and more important: “citizens are going to the streets to demand better education, gay marriage, and the protection of the environment. They are asking for changes in one of the most unequal societies in the world” (Ibid.).
Recently in 2014, Michelle Bachelet won the elections with several promises such as the free education reform, the improvement of health care and the decrease of inequalities (BBC News 2014).
Graph 1: GDP growth (annual %)
Source: World Bank Data
2. POVERTY AND INEQUALITY
As mentioned in the theoretical section, poverty is a multidimensional concept and, because of its difficulty to grasp, the income and consumer spending are chosen to measure the level of material well-being (Ballesteros & Valenzuela 2011). In the graph 2, it is shown the poverty headcount ratio at the national poverty line (% of population) i.e. the percentage of the population which lives under the national poverty line – related to the cost of a food bundle – considering the income and consumption of the household (World Bank Data). The national poverty line permits a comparison of different years of the same country over time but not different countries (Ibid.).
While during Allende's government, socialists backed a state-led development strategy and a focus on issues as poverty and the unequal income distribution, these policies were completely overturned by the next government.
Throughout the first year of Pinochet's mandate, the shock provoked by the coup d'etat and the sudden change of economic policies, aggravated the level of inflation worsening the poverty in the country (Klein 2007: 14). In order to explain the situation in the country during these years, Gunder Frank, asserts,
Roughly 74% of its [Chilean family] income went simply to buying bread, forcing the family to cut out such “luxury items” as milk and bus fare to get to work. By comparison, under Allende, bread, milk and bus fare took up 17% of a public employee's salary (Ibid.: 15).
The high price of food due to inflation and the removal of the school milk program aggravated the health conditions of people and also the school attendance (Ibid.). Moreover, the reduction of trade barriers caused an increase of imports, and, consequently, the failure of local enterprises which could not compete with foreign ones (Ibid.). The result was that the levels of poverty increased during the first years of Pinochet's government especially in 1975 when the GDP fell by 12.9% and the rate of unemployment reached 17% - three times the levels of the 1960s (Williamson 2009: 506). In 1988, as shown in the graph 2, people who lived under the poverty line were almost the half of the population. What is relevant to note is the level of inequality during these years. As a matter of fact, the level of inequality in 1987 was really high, indeed the top 5% of the population gained more that 80% of the national income (Klein 2007: 17; Williamson 2009: 506). As can be seen from the graph 2, people who lived below the poverty line decreased from 45% in 1988 to 20% in the 2000s. This is due to social policies and the result of economic growth reaching 14% in 2011 and 11% in 2013 (World Bank; Barcena et al. 2013: 17).
Graph 2: Poverty headcount ratio at national poverty line (% population).
In terms of income distribution, graph shows that 20% of the highest-income people received the bigger share of income which in 1987 was 61.4%, and remained more or less stable until 2006 when it fell to 57.5% (World Bank Data). On the other hand, the lowest-income people received almost 3% of the national income which started to raise in 2006 (Ibid.). Nowadays, Chile still presents high income inequality compared not only to the other OECD countries (apart from Mexico), but also to Latin America where Brazil, Argentina, Venezuela and Peru are significantly reducing the gap between rich and poor in accordance with CEPAL data (OECD; Barcena et al. 2013: 20).
Graph 3: Income share held by highest and lowest 20%.
Nevertheless, although Chile is growing at a rate of 3-4% annual GDP, the level of inequality decreases slowly and it is still really high compared to other Latin American countries. In fact, according to some surveys, the feeling of vulnerability related to the labor market, health, education and social security programs is still widespread among the population (Contreras 2007: 376). Therefore, other factors are influencing the levels of inequality beyond the economic ones. Indeed,
Segregation in neighborhoods and schools, for example, is both a cause and an effect of poverty and inequality, with negative consequences for social cohesion and the opportunities available to the segregated groups. This exclusion includes lack of access to education and the labor market, which only compounds poverty and inequality and creates poverty traps (Ibid. 378).
In summary, the economic growth and the decrease of the level of poverty are positive indicators of development but the high inequality reflects the exclusion of poor people not only in terms of income, but also of education, health, social and economic opportunities (Ibid.: 379).
3. POPULAR ECONOMY IN CHILE
Historically, the popular world started to develop in the peripheral urban areas i.e. the villages, in Chile called poblaciones[16], in the 19th century “which generated a “dense 'social productive' fabric on the fringe of activities of large merchants” (Nyssens 1997: 174). Initially, the popular economy consisted in groups of families – mainly artisans – who made use of “local and cheap resources” and provided for their needs such as health care, education, saving and social protection (Ibid.).
In the second half of the 19th century, the arrival of the capitalist industry of the “mercantile elite”, backed by the state through its regulations, prevailed on the “local social productive” mode (Ibid.). During 1900, the popular economy, which represented 20% of the national workforce, was considered to be part of the proletarian class which opposed the capitalist class (Ibid.: 175). The coup d'etat represented a turning point for the popular economy not only for the political repression of the traditional associations present in the popular world, but also because the free trade caused the exclusion of a mass of “new poor” who previously were part of the modern system (Ibid.: 176). The economic vulnerability of this sector and the arrival of new “participants” gave rise to protests and resistance against the political repression (Ibid.). During Pinochet's government, “the popular economy became a powerful means of resistance against the popular world's political, cultural and social exclusion and its economic precariousness” (Ibid.). Through time, the phenomenon has become more and more complex, constituted by a heterogeneous reality made up of not only microenterprises but also “popular economy organizations”[17] characterized by different levels of development as shown below (Ibid.).
Table 3: The structure of the Popular Economy.
In table 4, it is shown the complexity of activities present in the popular economy: on the left side there is the level of development while above there are the different forms of production.
Nowadays, the popular economy is recognized as an “active economic subject”, a source of employment and revenues (Ibid.). In 2013, the national government carried out an inquiry about the world of microenterprises in order to inform society the importance of this phenomenon. According to this study, almost half of the entrepreneurs are informal because they considered themselves too small to formalize. As well they have difficulty at seeing the positive benefits of this time and cost consuming process (Ministerio de Economia 2013: 2-3). Dedicated to agriculture, fishing, cleaning service, mining industry, craft work and commercial sectors, microenterprises in the popular economy are most of the time motivated by necessity to survive because they cannot find jobs in the formal system. They want to gain more money or, for women especially, they have to take care of children or elderly people (Ibid.: 8). It is not an opportunity as it is for formal entrepreneurs, for the choice is almost mandatory in order to survive. Additionally, a comparison between the formal and informal economy shows that people of the popular economy have lower levels of education and 65% of them gain less than the minimum salary[18] while in the formal sector, it is just 17% (Ibid.). The social segregation caused by the income discrimination is reflected not only in the educational field but also in the health system as shown in the graph 4.
Graph 4: Distribution of people based on public/private health insurance and income
People who belong to the poorest segments of the population are covered by the public insurance (FONASA) while the private insurers (ISAPRE) are available to the wealthy population. The investments on the public system are quite scarce and this entails the reduced possibility to satisfy the demand of extended segments of population that make use of it (Goyenechea & Sinclaire 2013). In the table 4 i the characteristics of the popular economy compared with the formal sector are resumed.
Table 4: Summary of the characteristics of the formal and informal sector of microenterprises
|Characteristics |Popular Economy |Formal Sector |
| |(Informal Sector) | |
|Percentage of entrepreneurs |48,4% |51,6% |
|Main Reasons |Necessity |Opportunity |
|Percentage of enterprises who has 1|74,2% |35,5% |
|worker | | |
|Percentage of enterprises who has |92,6% |52,8% |
|maximum 2 worker | | |
|Percentage of people who studied |55,3% |84,4% |
|maximum until the high school | | |
Source: Ministerio de Economia 2013: 1-15.
4. MICROFINANCE INSTITUTIONS IN CHILE
In this section, I will briefly present microfinance institutions in the context of Chile. These institutions mainly work with economic businesses which constitute the popular economy.
As mentioned before, during the crisis of the 1980s, people, which were excluded from the formal sector, struggled to find alternative modes of production in order to survive. The world of microenterprises became visible (Martinez et al. 2009: 143). According to some studies published by private organizations, the necessity of financial resources represented the barrier to the development of microenterprises due to the risk and lack of profitability for the local banks. At the end of the 1980s, some institutions started to offer microloans, such as the Banco del Desarrollo, and a series of NGOs and foundations (Ibid.: 143-144). The establishment of democracy in the 1990s, the withdrawal of international funds destined to other poorer countries and the constitution of a state program, named FOSIS, which offer financial support to microenterprises, established the foundations of the modern system of microfinance (Ibid.: 144). Nowadays, eleven microfinance institutions are gathered in the Microfinance Network - so-called “Red para el Desarrollo de la Microfinanza en Chile”-, instituted in 2001, whose mission is to develop the microfinance world through the improvement of interactions between them and with the government in order to enhance the equality of opportunity (Red para el Desarrollo de la Microfinanza en Chile website). In regards to the relation with the government, the program FOSIS[19] dispatches public funds to microfinance institutions that work with an integrated approach (Martinez et al. 2009: 147).
In the table below, it is possible to notice the differentiation between microfinance institutions in terms of legal nature, type of credit, clients, products and services offered. The main distinction between them is highlighted in the section “clarification of terms”. Institutions such as NGOs, have an integrated approach, and their clients belong to the most economic vulnerable groups, especially women, who live in the villages. Their aim of these institutions is to generate positive impacts for the social and economic well-being and for the community (Martinez et al. 2009: 79). Moreover, the institutions with an integrated approach not only offer loans but also training and networks through a model based on groups. On the other hand, the other institutions deal with clients with a consolidated business and offer them different products and services with the aim to increase the financial inclusion (Ibid.: 77). These institutions offer not only individual credit for income-generating activities but also other services such as consumer credit and mortgage credit. while the others serve a more “bankable” clientèle, i.e. formal and with guarantees micro businesses.
These aspects will be examined in the analytical section where the case study will be analyzed according to the institutions that offer loans.
Furthermore, the microfinance world is well variegated and presents various differentiations within it: below table 5 summarizes the institutions present nowadays and their financial models.
Table 5: resume of the microfinance institutions gathered in the Red para el Desarrollo de la Microfinanza en Chile.
Source: Red para el Desarrollo de la Microfinanza en Chile 2013.
5. CASE STUDY
Before starting the analysis, the presentation of the case study will be illustrated in order to show the departure point of this social research. As mentioned in the methodology, 14 people were interviewed about the impacts of microcredit in their lives in terms of income, family well-being, empowerment and social capital. In the annexes section, a table summarizes the main information about the clients that were interviewed in order to give a brief description of their social and economic condition that are here presented in an aggregated way.
As a starting point, it is important to stress if in the case study the microfinance institutions are actually serving the bottom of the pyramid, i.e. people that are vulnerable or in risk of vulnerability. In this sense, an instrument based on surveys utilized by the government identifies the level of poverty of people. This instrument is used to put in action social policies directed to them. “Ficha de Proteccion Social” (FPS), consists in giving a score to the state of poverty of people considering the presence of elderly, pregnant, low-educated and unemployed individuals in the household (Biblioteca del Congreso Nacional de Chile website). The aspects taken into consideration are the socio-economic characteristics of the family such as the income, the condition of the house and its inhabitants in terms of health, education and employment (Ibid.). With respect to these indicators, people are organized into sections according to the score in 6 quintiles. The first quintile gathers the most vulnerable people (score: from 2.072 to 8.500), in the second people that have score from 8.501 to 11.734, and in the last from 11.735 to 13.484 (Glosario of Ministerio de Desarrollo Social website). With regards to this classification, people that were interviewed are distributed as in the graph.
Graph 5: Distribution in terms of FPS (vulnerability) of people interviewed
[pic]
Source: Author's formulation
Through this graph, it is possible to notice that the people interviewed belong to different levels of vulnerability and are representative of the heterogeneity in the popular economy. Within the first quintile, 12 out of 14 people belong to the most vulnerable sector and are recipients of public social benefits, e.g. scholarships for students and delivery of food in the schools (Ficha de Proteccion Social website). The second and the third quintile correspond to higher levels of wealth.
Other interesting data regards the level of education and the health system of the interviewed people that are shown in the annexes (table 1). The level of education shows a normal distribution where the majority of them (13 out of 14) were educated to high school at most. This confirms the analysis of the popular economy in the empirical data section. With respect to health, unfortunately the information is not always available but almost all the people interviewed belong to the public system FONASA and, specifically, the first quintile which gathers vulnerable people with medical assistance for free.
About the interviewees' businesses, below there is a classification according to the forms of organization and differentiated levels of development.
Table 6: Classification of businesses according to levels of development and forms of organization.
Within the interviewees’ businesses, the grocery stores and the pound shop, which are also legally formal, are considered as life strategies and family businesses. Indeed, it is the main household activity, which involves sporadically other members of the family. Productive – and service- businesses such as seamstress, hairdresser and pastry chef are individual activities, mainly carried out in the house, and are also life strategies. All the other businesses are mainly survival strategies practiced occasionally in the market or in the streets of the poblaciones where they live, contributing to the household income. This classification will be useful in the analytical section when I will analyzed income.
6. ANALYSIS
The analysis is divided into four sections which are income, family well being, empowerment and social capital. Starting from the case study, I will analyze the impact of microcredit on these four variables considering the differentiation between MFIs with a minimalist and a integrated approach explained in the section “clarification of terms”. The theoretical approaches will be the backdrop of the analysis and the perspectives of microcredit with the aim to answer the problem formulation.
1. INCOME
In the popular economy, people which are unemployed or are not satisfied of their jobs, are pushed by necessity to find a creative and effective way to earn an income that could meet their needs. In order to generate employment and to improve living conditions, one of the instruments is self-employment[20] initiatives in different sectors of economy. The aim of these initiatives is to maximize the net income which is dependent on fixed assets such as machinery and equipment, working capital, employment and entrepreneurial knowledge as represented in the scheme below (Martinez et al. 2009: 96-104):
As can be seen in the scheme, through investments in capital, employment and entrepreneurial knowledge, microcredit impacts directly the income. In the case study, in order to identify the variation of net income of microenterprises, I conducted a comparison between the income before receiving the loan and the income recorded afterwards. With this method, based on quantitative data, it was possible to notice an increase of net income for almost all businesses as showed in the annexes (table 2 and 3). According to the interviewed, net income almost doubled for all microentreprises that participated in a microcredit program. Nevertheless, in two cases, the income decreased because of endogenous and exogenous variables. In the first case, the microentrepreneur managed a “casino” of slot machines. In 2004, she was not able to stand the competition of other micro businesses and the spread of new video games such as Nintendo and PlayStation (Susana, personal communication, 23rd April 2014). After the failure of her business, Susana started working as an employee until 2014. Since she had to take care of her niece, she set up a grocery store in a rural and less dangerous area than before. In the second case, the client's health problems entailed high and unexpected expenditures which caused the decrease of the income. In spite of these two cases, the trend is that microenterpreneurs, which participated to a microcredit program for more than one year, viewed an increase of their net income. When I conducted the interviews, 9 out of 14 people gain more than the minimum salary[21] but when the same individuals asked for the first loan there were just 4 overcome it. Nevertheless, the maximization of the income is not the main aim for some interviewees. Indeed, some microenterprises are life strategy oriented, which means that the family well-being is based on the economic activities. These strategies are pursued through the differentiation of goods and services and number of hours dedicated to the job. On the other hand, as Mauricio Rojas says
“People look for a job that lets them live with dignity. Increasing income and growth implies that people have to incorporate management abilities, organize human resources, financial administration. These requirements are difficult to learn (…). Growth is a big stress and sometimes not all people have this aspiration (Rojas M., personal communication, 17th April, 2014).
As he says, not all businesses have this aim of growth. Indeed some activities have survival strategies, e.g. street vendors. This means that people manage their business for a limited number of hours during the week. In this case, the aim is not to grow and maximize the income but to gain an extra income that could satisfy their needs in a better way. As in the case of Susana, the maximization of income was not the only aim. Indeed the necessity of taking care of her niece pushed her to occupy herself in a less binding activity in terms of time and workplace (Susana, personal communication, 23rd April 2014).
The increase of income is due to organizational and/or structural changes of the economic unit of the microentrepreneur. Indeed, microcredit directly impacts some variables, i.e. investments in capital, in the employment of new workers and the improvement of entrepreneurial knowledge. The distinction of methodology applied by the various MFIs, minimalist or integrated, entails a differentiation in terms of impact on these factors and, consequently, on the income, as will be analyzed in the next sections.
1. THE MINIMALIST APPROACH ON INCOME
Through the individual credit, MFIs such as banks and cooperatives but also FINAM and Microfinanza Emprende have a minimalist approach. The conception behind MFIs with minimalist approach is that microcredit is a development strategy per sé where “the missing piece” for the business growth is the “lack of affordable, accessible, short-term credit” (Ledgerwood 1998: 66). MFIs offer financial intermediation as a remedy for poverty to some segments of the population, while other services such as health, education and enterprise development services are provided by other institutions (Ibid.). According to this, in the case study, people that receive an individual credit from banks have access to associated services as credit cards for consumer credit, bank accounts, savings accounts and so on. In other words, MFIs with minimalist approach offer to their clients a complex and varied selection of products related to the financial intermediation to clients that manage business already consolidated. The profundity of services permits vulnerable people not only to invest money in her/his economic activity, but also to save money in a bank account, have a mortgage loan and consumer spending. I will face these instruments in the section dedicated to the family well-being, but for now it is interesting to point out the idea that a microcredit opens various doors for the improvement of poor people's living conditions.
In the case study, beneficiaries of this kind of credit preferably invest on fixed assets, working capital or renovation of the store. According to the interviews, microentrepreneurs who manage self-employment initiatives already consolidated, such as hairdresser, seamstress and shopkeeper, have invested in new equipment and machinery. Nevertheless, the certainty that borrowers channel the loans into consumer spending rather than into income generating activities is quite widespread. According to Bateman, people use loans to satisfy basic needs i.e. “to buy food (…) [and then] funerals, school fees and medical expenses become the most pressing needs” (Bateman 2010: 11). In the case study, Maria Eugenia requested for a loan in order to invest in assets. Nevertheless, she utilized it for unexpected medical expenditures (Maria Eugenia, personal communication, 30th of April 2014). Conversely, Paula requested a consumer credit to buy equipment for her business (Paula, 28th of April 2014). Hence, the widespread idea that vulnerable people do not use loans for income generating activities is debatable, and it is a responsibility of the field work executive to evaluate. Moreover, the case of Paula shows the information asymmetry due to the lack of entrepreneurial knowledge of the borrower and, moreover, to the lack of training of the lender.
Besides investments in fixed assets and working capital, MFIs with a minimalist approach did not impact the number of workers in the microenterprise, especially outside the family. Indeed, microentrepreneurs are mainly self-employed or ask for help to relatives (Martinez et al. 2009: 108). Maria Eugenia, client of several institutions, owns a grocery store where her husband and sons help her some days but she does not want to hire people outside of the family (Maria Eugenia, personal communication, 30th of April 2014). Differently, Paula would like to hire someone that could help her especially during winter when the requests for school uniforms are many and she cannot satisfy all the demand (Paula, personal communication, 28th April 2014).
Finally, with respect to the entrepreneurial knowledge, MFIs with a minimalist approach do not offer courses about business training or other initiatives because they prefer to maintain a clear focus where they have comparative advantages Ledgerwood 1998: 66). These services are offered by other institutions private and public. FOSIS controlled by the government offers courses of business training to support the vulnerable families and improve housing. On the other hand, organizations such as “Trabajo por un Hermano” (TPH) offer training and assistance to vulnerable people to improve people's employability and their microenterprises. As Mauricio Rojas, director of TPH says,
There is a responsibility of the society to help vulnerable people. It is like in a family when there is a son with a disability: we give him more attention and more resources. I think that people of vulnerable sectors have had less opportunities in respect to the rest of the society. Thus the society has to worry more for this segment to help them develop (…). [Besides] it is not just to give credit because there are several bigger problemst. Microentrepreneurs have an innovative profile and experience, and credit is always useful especially with training (Rojas, personal communication, 17th April, 2014).
With this statement, he declares his indifference towards services different from the credit. Indeed, other public or private institutions should take charge of this responsibility.
To conclude, MFIs with a minimalist approach serves vulnerable people through a differentiated selection of financial instruments. As can be seen from the case study, the impact of microcredit on income is not clear and noticed in all the cases: as a matter of fact, just in two cases there is an increase depending on investments, while in the other two cases, the result is controversial. In fact, in one it is contradicted by the failure of the microenterprise. Deficiency in entrepreneurial knowledge and information exchange have influenced negatively the economic trend of the initiatives. On the other hand, in the case of Maria Eugenia, the negative trend is mainly due to the lack of social services rather than the nature of credit.
2. INTEGRATED APPROACH ON INCOME
In this part the focus will be on MFIs with an integrated approach, that is those which offer group lending. The focus of MFIs with integrated approach is not only on financial intermediation as seen before, but on the development of cooperative systems characterized by solidarity. As the website of Grameen bank affirms,
The Group Model's basic philosophy lies in the fact that shortcomings and weaknesses at the individual level are overcome by the collective responsibility and security afforded by the formation of a group of such individuals. The collective coming together of individual members is used for a number of purposes: educating and awareness building, collective bargaining power, peer pressure etc. (Grameen Bank website).
The concept of “solidarity” refers to peer pressure which uses moral and other linkages between borrowers and project participants to ensure participation and repayment in microcredit programs (Grameen Bank website). This peer pressure is used as a substitute to traditional collateral. Nevertheless, the concept of solidarity goes beyond that including broader options of behaviors, i.e. the overcoming of individuality or the creation of cooperatives. In Chile, various organizations employ this methodology not just for the peer pressure benefits, but also for the positive effects that will be illustrated hereafter.
With respect to the case study, microcredit of MFIs with integrated approach impacts the income through the investments on working capital such as fabric, clothing and other products. Differently from individual credit, this type of credit does not permit the investment in machinery and equipment because of its modest amount. Investments in fixed assets would be possible through accumulating loans over the years as in the case of Rosa: she started her business selling clothes, and then used the loan to build a pound shop in the house (Rosa, focus group, 5th of May 2014). The loan is utilized for the immediate purchase of goods to re-sell them or to transform them before the sell. Moreover, in the case study, there are no impacts of microcredit on employment, even if some microentrepreneurs take advantage of the help of other members of the family.
Differently from the minimalist approach, in the integrated approach there is an important change in terms of entrepreneurial knowledge. Interviewed clients participate in weekly or monthly meetings where MFIs staff teach them how to calculate costs, identify prices and marketing strategies, through which people can raise the net income. Moreover, the MFI puts into contact its borrowers with other institutions that offer courses and business trainings for people interested in improving their knowledge. Thus, thanks to trainings, clients perceive an improvement of the control and organization of their businesses with positive consequences on their net income. As Hugo asserts: “now we know what we are doing and this influences the run of our business. We can climb up and aspire to something more” (Hugo, focus group, 5th of May 2014). The exchange of information and knowledge is not only vertical but also horizontal and derives from group participation and its positive dynamics. As Luisa asserts, “the credit made us more responsible” (Luisa, focus group, 23rd of April 2014). In these informal groups, it is important to highlight the transfer of knowledge not only from the institution to people but also among people. Indeed, while the formal and codified knowledge can be transferred from institutions, tacit knowledge, as the result of experience and observation, “is acquired largely through association with other people, and requires joint or shared activities to be imparted from one to another” (Business Dictionary website). Thus, the value of these gatherings is based on the sharing of ideas, ways of working, experiences and opportunities. The result is the emergence of some experiences based on cooperation, and defined by Razeto as Popular Economy Organizations (PEOs). Indeed, as Isabel Infante, director of FINAM, asserts:
In the North and South of Chile, there are enterprises which cooperate in order to buy inputs and equipment, and sell their products together. They are then able to better negotiate the price of their products and compete in a better way. I think that cooperation is good for all levels (…). The general shortcoming is that people are not able to get out of their barrio[22] and sell their products. They have to be convinced of the benefits of working together (Infante I., personal communication, 28th of April 2014).
In the same way, informal cooperatives should exist in the popular economy but this is not so evident. For instance, there are people that cooperate to buy clothes for low prices and sell them in different areas in order to avoid competition between them. These experiences show the solidarity between microentrepreneurs and would be an interesting approach to the topic in a deeper way. Nevertheless, these gatherings are not always well appreciated. As Susana explains,
I do not think I will continue with Fondo Esperanza because I do not have time to go to these gatherings. It is a nuisance and I do not want to waste time. I cannot let my son be left alone and I do not want to close the store” (Susana, personal communication, 23rd April 2014).
In the Susana's evaluation, the benefits of cooperation are overcome by its costs, or by the predominance of other necessities. This demonstrates that many improvements should be generated in order to promote conscious and active participation in the group.
In conclusion, with respect to the integrated approach, there is a general improvement of income which essentially depends on investments in working capital and entrepreneurial knowledge. In regards to working capital, the raw materials can be amortized in the short term and in a less risky way compared to the fixed assets. On the other hand, the entrepreneurial knowledge permits a better symmetry of knowledge, both vertically and horizontally.
To conclude the section about income, there is generally no doubt that both approaches demonstrate positive impacts of microcredit on poor people's living conditions in terms of income. Nevertheless, there is a differentiation in the results of the two approaches. In the individual credit, the investments are more risky and, sometimes, clients are subjected to information asymmetry. In the group lending, the group is an instrument which creates responsibilities, namely solidarity. In the case that one borrower cannot pay his/her payment, the group substitutes the debtor minimizing the risk of default. The income gained through the micro enterprise is employed as family income to satisfy basic and other needs of the household affecting the family well-being.
2. FAMILY WELL-BEING
In this section, the economic and social impact of microcredit on family well-being in terms of savings, education, health, consumption of food and housing will be analyzed. As mentioned in the section dedicated to the clarifications of terms, family well-being is a satisfactory state of all the individuals of the family. Due to the difficulty of evaluating the impact of microcredit on changes in family well-being, this part is entirely based on the s of interviewees assessments. During the interview, people have discussed their evaluation on how microcredit has changed their consumptions, savings, health and education. In scheme below it is shown a scheme on the impact of microcredit on these aspects that will be discussed in light of the differentiation of MFIs approaches.
1. CONSUMPTIONS IN FOOD AND HOUSING
Productive microcredit can give the opportunity to make borrowers able to make decisions about consumption that would be unfeasible without it. In other words, microcredit can promote an improvement of consumption that leads to better living conditions (Niccoli & Presbiterio 2010: 78). As mentioned in the section related to the income, through micro loans, people can increase their income and, consequently, their household consumption. The money that is not spent is saved to face future needs.The link between more consumption and better living conditions is discussed by Bateman who highlights that
we know that consumption of some products and services ultimately destroys human welfare: class-A drugs, tobacco, strong alcohol, images of violence and certain categories of junk food are obvious examples (Bateman 2010: 13)
Indeed, consumption does not always lead to improvement of living conditions, nevertheless, as Mauricio Rojas affirms,
What we call consumption can be considered as development of the family. What is development? The improvement of living conditions in terms of relations, spirituality and economy. Consumerism is negative but if a family has the possibility to buy a water heater or a fridge, this is pure development in my opinion because it improves living conditions (Roja M., personal communication, 17th April, 2014).
As he affirms, the possibility to buy a heater or a fridge improves the family well-being because all the members can take advantage of these expenditures. According to the case study, the interviewees observe an improvement of their living conditions in terms of consumption of food, housing and transport. Indeed, Luisa asserts, “I could buy more things, first of all food and then things for the house” (Luisa, focus group, 23rd of April 2014). Similarly, Marcela affirms
My partner is the family provider because he receives a monthly salary, but my income helped very much. Not only did I invest it in inputs for my economic activity, but also I contributed to expenditures in food, improving the nutrition of the family (Marcela, 23th of April 2014).
In this way, changes of income influence directly the household consumption in terms of food, housing and transport as can be seen from the table.
Table 6: resume of family well-being recorded in the case study
Source: Author's formulation
In table 6 it is possible to see that 12 out of 14 interviewed register an improvement in household consumption. On the other hand, two cases have perceived a worsening since they received their first loan. As mentioned in the section dedicated to the income, Susana affirms,
I had a really tough period due to the lack of money, and my husband did not give me money for the children. One of them was finishing high school, but the other two were still attending school. Since the situation was worsening and we needed money to buy food and use transport, I started working as an employee (Susana, personal communication, 23rd of April 2014).
According to the interview, the decision to work as an employee is due to the worsening of the living conditions of the entire family. In the other case, Maria Eugenia saw a worsening in her living conditions because her income started to decrease and her household consumption suffered lightly. Despite the decrease of the income, she does not suffer any decrease in consumption because this is replenished by the income of other family members. This situation can be distinguished from that of Susana. Indeed, she could not rely on the strong ties within the family and, after the failure of the activity, she was constrained to look for employment with guaranteed salary at the expense of flexibility of her previous situation.
To conclude, microcredit has an indirect impact on household consumption in terms of expenditures in food, transport and housing. The majority of the cases present an improvement of living conditions due to the participation in a microcredit program. On the other hand, one case records a worsening that is not due to bad decisions of expenditures as Bateman says. Rather the decrease of the income provoked a worsening of household consumption because she had to limit her decisions on consumption expenditures.
2. HEALTH AND EDUCATION
Various studies on the impact of microcredit showed positive effects on well-being indicators such as education and health. Nevertheless, nowadays the link is debatable because there are other concurrent reasons that influence the local development, for instance private initiatives managed by private and public institutions (Niccoli & Presbiterio 2010: 78). Indeed, the reasons for the improvement of education and health could be not uniquely financial, but also due to the development of more inclusive public systems. Based on the interviewees' assessments, there is no a clear impact of microcredit on education and health of the family. With regards to education, the interviewed do not feel any improvement, however they declare that, through their economic activities, they would like to give their children a better future. Thus, benefits in terms of education and health need time to materialize (Ibid.: 73). As Hugo asserts, “all the people that are here [in the gathering] are here for their families (…). We have a lot of trust in the future”(Hugo, focus group, 5th of May 2014). It is possible to assume that microentrepreneurs are interested in the improvement of living conditions of their family members’ future.
Nevertheless, “microcredit programs do not change the structural conditions of globalization—(...) that is privatization of essential public services, or cutbacks in health and education spending” (Feiner & Barker 2006). In other words, the responsibility for health and education are placed onto the backs of poor people who have to struggle to get out of poverty and improve their family well-being (Ibid.). Microcredit could have an impact on education and health in the long run, albeit a struggle, but as well, other services are necessary to satisfy these needs. As seen in the case study, the interviewees did not achieve high levels of education. In order to change the structures of poverty and inequality, interventions in terms of education and health should be discussed to meet new solutions. Public health programs such as AUGE 80, permit vulnerable people to benefit from better medical assistance. These interventions affect the structural conditions of poverty and inequality (World Health Organization 2008).
Alternatively, Pablo Coloma asserts,
I can be bothered that things are as they are. Nevertheless, it is better to go out and reduce poverty (…). Poverty is structural, deriving from an unfair structure of society and an unequal division of power, from egoism and injustice. Nevertheless, if we accept that the world is unequal, we are not going to fight (Coloma, personal communication, 30th of April 2014).
To conclude, microcredit alone cannot substitute public systems in the resolution of structural problems related to health and education. The state should retake its role in these sectors and collaborate with microfinance institutions in order to reach better results through adequate programs dedicated to poor people.
3. SAVINGS
In this last part of the family well-being section, I introduce the topic of savings as a mechanism to face future needs, thus to improve living conditions. Therefore, even if the widespread opinion is that poor people consume the entire income, various ways of saving are spread among them (Niccoli & Presbiterio 2010: 73). “If it does not happen, often it is because individuals do not have feasible tools among the informal channels to employ their savings” (Ibid., own translation: 74). With respect to savings, it is important to highlight the differentiation between the approaches utilized by MFIs. Indeed, if until now the impact on family well-being does not depend on this differentiation, for savings it is interesting to notice the different methods people employ to face future needs. Starting from the interviews, Paula declares,
I save money to buy my working capital, but also for my family needs. Indeed, in some periods, we use the money that I saved to use in our consumptions. After, I always replace it (Paula, personal communication, th of April 2014).
In the same way, Marcela says,
MFIs lend you a quantity of money and, in this way, give me trust. Thus, I have to save money and cannot waste it because I have to give back this money. I do not waste what I do not actually have (Marcela, focus group, 23rd of April 2014).
Both of them give remarkable importance to savings as a way to face future consumption even if none of them has formal channels to save their money. Clients served by banks and cooperatives have access to instruments that facilitate the process of saving. For instance, Maria Eugenia and Lidia have their saving accounts in case of necessity. For instance, when Maria Eugenia got sick and Lidia had to buy a new car (Maria Eugenia and Lidia, personal communication, 30th of April 2014). Institutions with a minimalist approach offer to their clients the possibility to rely upon saving systems. Nevertheless, the opportunity that MFIs with an integrated approach give their clients, is the ability to create other forms of savings, named Rotating Savings And Credit Associations (ROSCA). Gloria, president of the Banigualdad group, explains this form of saving,
We started the so-called polla[23] with Banigualdad. Basically, every Wednesday we meet and bring 10,000 Chilean pesos to add to the fund. Every week it is raffled to one person who gains the entire fund. We do this until all members of the group have received it (Gloria, focus group, 23rd of April 2014).
This form of saving is the result of ncooperation and solidarity among borrowers in the group, in spite of the risks that a person could pay his/her quota. This “Popular Economy Organization”, as Razeto (2006) calls it, is used to have savings available in order to face current and future basic needs. Moreover, as Gloria explains, in the weekly gatherings, Banigualdad makes borrowers collect money in the case that one person is unable to pay his/her payment. In this way, “money that was not utilized is newly distributed at the end of the cycle so we can get back our savings” (Ibid.) To summarize, there are different methods that vulnerable people use to save money to face future needs and, in this way, improve living conditions of the family. From one side, there are formal channels created by banks and cooperatives. From the other side there are instruments based on solidarity which satisfy people's needs thanks to cooperation.
In conclusion of the three sections, the interviewed recorded an improvement in consumption such as expenditures for food and housing, but not in education and health. With respect to savings, even if there were not many interventions about the topic, MFIs with an integrated approach encourage various forms of informal savings.
3. EMPOWERMENT
In this section, the impact of microcredit on poor people's living conditions in terms of empowerment will be illustrated. Generally speaking, studies about microcredit conclude that there is a positive relationship between microcredit and empowerment because
credit program participation leads to women taking a greater role in household decision-making, having greater access to financial and economic resources, having greater social networks, having greater bargaining power compared with their husbands, and having greater freedom of mobility (Pitt et al. 2003: 1).
Similarly, Pablo Coloma declares that behind microcredit there is a high level of people's empowerment. Certainly, “when you give a credit, you give dignity to a person that always saw closed doors, that nobody trusts” (Coloma, personal communication, 30th of April 2014). In this social research, empowerment is defined in terms of self-esteem, autonomy in taking decisions, view of the future, leadership and participation. Based on the perception of clients, it is possible to notice that the majority of the interviewees have perceived a positive impact of microcredit on their living conditions. Nevertheless, it is difficult to declare that these positive changes are due to microcredit or to other concurrent reasons.
With respect to self-esteem, all the cases show a general improvement apart from two cases. What it is interesting for the aim of this social research is the reason why people feel an improvement of their self-esteem. As Paula says,
When I was working as an employee, I bought some equipment, and, when my son was born, I started to work as an independent worker. With the money of FOSIS I could buy other machinery and the credit of FINAM gave me the possibility to buy fabric and other working capital. I started to have self-esteem when I had my own sewing workshop (Paula, 28th of April 2014).
On the other hand, Gloria, President of her group, affirms,
I improve my self-esteem thanks to my group. Indeed, I was never really talkative but in the group I started to be more self-confident (Gloria, focus group, 23rd of April 2014).
Paula, which has received credit from a MFI with a minimalist approach, perceives an improvement of her self-esteem because she could realize her dream. While Gloria, who participates to a microcredit program with Banigualdad, also feels more self-esteem, it is not only due to the fact that she realized her dream to cook. Indeed, she acknowledges the support of her group-mates, i.e. her friends and neighbors. These two statements reveal the importance of relations as a way to support the personal development of people and transform them from passive actors to active agents. Among the interviews, Makarena declares that she never had self-esteem and now it is even worse because of a difficult situation in her family. Despite that, her group mates support her and declare that “she has a strong character and self-esteem especially because she works directly with people in the market” (Makarena & Luisa, focus group, 23rd of April 2014). The other case is Susana, who during the years worked in her venue with slot machines, her self-esteem lowered because of her worsening of economic situation and her relationship with her husband. The feeling of loneliness is here expressed in this sentence: “we were able to get out of this situation thanks my sons and I who had struggled” (Susana, personal communication, 23rd of April 2014). Different from the cases seen above, Susana could not rely on the help of her family or community. Here it is highlighted that poverty is an individual problem and the solution as well.
With respect to the autonomy of making decisions and envisioning the future, there is a general improvement among the interviews. As Hugo says, “if we trust in the future, we can have a consolidated business without running away from the police because of our informality” (Hugo, focus group, 5th of May 2014). During the focus group with Fondo Esperanza, everybody seemed to agree with what Veronica said: “I feel much better than before thanks to the participation in this group. We have to always look beyond the present” (Veronica, focus group, 5th of May 2014). The positive repercussions in terms of autonomy, self-esteem and vision of the future are not only at a personal level but also at a family and community level. Essentially, women feel able to take control of her life for the first time. This determines a greater bargaining power, a different distribution of the roles within the family, a greater appreciation of herself and from the community in which she develops her personality.
Finally, empowerment in terms of participation[24] and leadership[25] shows a differentiation of results depending on the institutions that offer the loan. From the one side, people who were served by institutions with a minimalist approach did not see any improvement or effect. On the other side, people that received the loan from a MFI with an integrated approach stress the importance of leadership and participation. Indeed, the Banigualdad group tells that there was a significant change with respect to the formation of the group. It is possible to notice the change through the level of intervention of members during the gatherings: currently, almost everybody is an active participant. Marcela (focus group, 23rd of April 2014) thinks that people in the group became too headstrong and this provoked a rift within the group creating problems in terms of teamwork. In spite of the rift, they could cooperate and organize some economic activities together, as Gloria (Ibid.) explains: “we are here all together and we like planning new ideas”.
Graph 8: resume of the results of the interviews about the impact of microcredit on empowerment.
Source: Author's formulation
As can be seen in the graph, the remarkable difference between institutions regards “participation and leadership”. Indeed, these assume that there are groups where people can participate more actively and demonstrate their leadership attitudes. This is necessary to develop self-esteem, self-confidence, and vision of the future. As Luisa says,
The participation in the group gave us the possibility to meet more people and to develop our personality further, in order to have bigger wishes. As a matter of fact, at the beginning we were not so self confident (Ibid.).
Even if interviewees feel an improvement of empowerment, some scholars sustain the contrary. Bateman thinks that setting up businesses is not always what women want:
neoliberal social policy models are very clearly contingent upon the expansion of self-employment and microenterprises in order to facilitate the “flexibilization” and disempowerment of the labour force (…) Many women have been deliberately shifted into a far weaker and less remunerative self-employment position than hitherto- that is, they have been disempowered (Bateman 2010: 15).
As Bateman declares, through microcredit, women have been disempowered because of the shift from jobs outside the house with better salaries and protections towards more risky and insecure self-employment. This seemed to be confirmed by Paula's statements who declares that her prices are lower than those in the market and she feels overloaded during the summer (Paula, personal communication, 28th of April 2014). She also adds that she would like to have her own place to work outside the house but, apart of the fact it is too expensive, she has to stay with her son (Ibid.). From these interviews it is clear that various microentrepreneurs, especially women, decide to work in the house in order to take care of their children and elderly people in the family. Nevertheless, Bateman's statement is controversial because often the choice is not between a salaried or self-employment through microcredit. Rather it is a matter of a necessity of facing poverty and to improve living conditions thanks to the opportunity offered by microcredit in absence of an alternative. Moreover, with regards to the reality of Chile, there is a widespread opinion among people that work in the microfinance field . They think that micro-entrepreneurial activity is actually the best option for these people (Coloma, Vera, Rojas). Indeed, as Coloma explains,
work as employees would be the best option if it were a different more developed Chile with a higher level of education, a richer labor market and more flexibility. Nevertheless, in the context of Chile nowadays, microentrepreneurial activity is the best option considering its population, its level of poverty and vulnerability and people's abilities. I do not like when people speak of microentrepreneurial activity as underemployment, or insecurity or as the worst job because the real job is the one with a contract. It is just a partial reality (…) Indeed, in a independent job, the levels of self-realization are higher than the salaried job because people can do what they want, what they like and in the way they prefer (Pablo Coloma, 30th of April 2014).
This thought, shared among the MFIs community, highlights that formal jobs are not always the best options for vulnerable people in Chile. Indeed, the reason is that “hygiene factors” such as salary, leisure time and workplace of salaried work do not always satisfy the worker. Additionally, motivators, e.g. the benefits, self-realization, a good environment, relationships with the boss and workmates, personal development and of the family are better in independent jobs in some cases (Vera, personal communication, 6th of May 2014). According to the dual-factor theory[26], people work independently because it is the most satisfying choice among the alternatives that people have. Indeed, in some cases, people in the popular economy could earn more money above the minimum salary. However they prefer to have a job where they can schedule their own hours and balance work and life at home. Moreover, this option allows more self-realization and personal development (Ibid.).
To conclude, according to the interviews, there is a quasi-general improvement of living conditions in terms of empowerment with different results depending on the MFIs approach. Even if some scholars (Bateman, Chang) believe that microcredit promotes disempowerment, this is not the subjective perception of the interviewees, even for those who can be identified in the situation described by Bateman.
4. SOCIAL CAPITAL
In this section, the impact of microcredit on living conditions in terms of social capital will be analyzed according to the differentiation between MFIs approaches. Various scholars (Putnam, Coleman, Bourdieu) have tried to define the concept of social capital. For the purpose of this social research, I will use the conceptualization of Alessandro Pizzorno (1999: 374, own translation), Italian sociologist, which defines social capital as “formed by the social relations of an individual considered as a set of resources which he can utilize, together with other resources, in order to pursue his aims in a better way”. As he adds, not all the relations can be considered as social capital. Hence, he narrows down the definition of social capital to those relations where there is recognition of identity and forms of solidarity and reciprocity (Ibid.). According to him, there are two forms of social capital: one based on solidarity and the other on reciprocity. The first one consists of relations based on strong ties[27] within a cohesive group characterized by the homogeneity of members in terms of culture, origin and interests. On the other hand, social capital based on reciprocity is grounded on weak ties between heterogeneous individuals who aim to pursue a common interest (Ibid.: 381-382).
These two different forms of social capital described by Pizzorno can be utilized to show the concrete relations which exist in the context of the popular economy in Chile. As Victor Vera affirms,
Poor people live thanks to these relations [the ones based on reciprocity and solidarity] because they could not rely just on the other two [exchange and subsidiary relation] (…) Microfinance works in this way: there is an offerer, that is the MFIs, and a demander, microentrepreneurs. The first one offers financial intermediation with an interest which would not harm the income of the business. Thus, we can say that there is a virtuous relation: the aim of the institution is not to be millionaire or lucrative, but to be fair in order that both subjects can grow. This relation can be considered as market exchange but characterized by solidarity because the institution has a social aim (Vera, personal communication, 6th of May 2014, own translation).
The aim of this relation is to maintain an enduring relation where the recognition of reciprocal identity and trust are the cornerstone. Trust between the MFI and the client is established with the field visit of an employee, which evaluates people businesses, and is strengthened with the return of the payment. In this way, microcredit is an instrument which permits and gives trust to people which improves their level of self-esteem and self-confidence. The form of social capital based on reciprocity is common to all the relations between MFIs and their clients. Nevertheless, only microcredit offered by MFIs with an integrated approach promotes forms of social capital which go beyond the simple reciprocity of relations between the MFI and the beneficiary. Indeed, the group lending creates stronger inter-personal ties within the group which strengthens over time. During the interviews with the two village banks, it is found the function of the group as space of interchange. The gatherings become a space “outside the house” where people exchange information and experiences, and strengthen their ties. Juan Cristobal, general manager of Fondo Esperanza, explains,
The solidarity methodology permits a greater development of social capital, that is to create ties with neighbors and people of the same sector or industry. The groups are spaces of information exchange and promote development of knowledge and empowerment (Romero, personal communication, 22nd of April 2014, own translation).
Similarly, from the clients' interviews, it emerges that the participation to microcredit programs promotes social capital. For instance, Gloria noticed an improvement not only of her business but also of her personality thanks to participation in gatherings and group activities (Gloria, focus group, 23rd of April 2014, own translation).
According to Pizzorno's theory, the social capital which the members generate within groups, is based mainly on solidarity. Indeed, groups presented here are characterized by a high homogeneity in terms of origin, job, level of poverty, education and culture. The solidarity which characterized the group is so strong that the group intervenes to sustain their fellow members in case of necessity when the person is not able to return his/her payment. This method reinforces the social ties, improves trust and permits to face unexpected economic needs. Therefore, “when the state is unable to provide basic services, social capital based on family relations and kinship provides a cushion against hard times” (Panth 2010). Nevertheless, the social capital based on solidarity is not sufficient for the personal and social development of people. To reach this aim, it is necessary to create social networks between socially heterogeneous groups. The aim of this form of social capital is “to share and exchange information, ideas and innovation, and builds consensus among the groups representing diverse interests” (Ibid.). Microfinance programs, although fundamental to promote the cohesiveness within a group, should also create other forms of ties in a way that people could have experiences outside of their neighborhood or family. As Isabel Infante says,
I like the group approach because people support each other, exchange advice and it could lead to a faster development compared with the individual credit (…). Nevertheless, what is necessary is that people could go out of their neighborhood (Infante, personal communication, 28th of April 2014, own translation).
In conclusion, the improvement of living conditions in terms of social capital can be identified only in clients of MFIs with an integrated approach. In line with the philosophy underlying to the Grameen Bank, cooperation and solidarity create a virtuous circle within the village banks.
6. CONCLUSIONS
Microcredit is a financial instrument given to poor people which are excluded from the traditional banking system in order to be invested in income-generating activities. This instrument can generate economic development in terms of income and consumption. Nevertheless, there are services associate with credit, such as business training and the promotion of social networks, which generate human and social development. From one side, there is a visible aspect related to microcredit which is the economic process of capital and work transformation into outputs which generate income. On the other hand, there are invisible aspects underlying this process of transformation. These factors consist of “processes of values, relations and symbols which influence fundamentally motivation and productivity on the most important factor, that is the human labor, with decisive effects on the final result” (Becchetti 2008: 64).
The results of this case study conducted in Chile tend to confirm the validity of microcredit as instrument which generates positive economic and social impacts on poor people's living conditions. Indeed, it is possible to conclude that microcredit has a quasi-general positive impact on income and family well-being in terms of consumption and savings. All microfinance institutions, either with a minimalist or an integrated approach, generate positive economic impacts. Nevertheless, only microfinance institutions with an integrated approach have better results about empowerment and social capital. Indeed, these institutions offer not only credit but also other services such as business training and the promotion of social network. Hence, microfinance institutions with a minimalist approach work in a more neoliberal logic because is focus only on economic needs. On the other hand, microfinance institutions with an integrated approach work in a logic closer to the solidarity economy approach. Indeed, they focus not only on economic needs but also on individual and social needs considering poverty in its multi-dimensionality.
In order to improve the impact of microcredit on poor people's living conditions “it is not sufficient anymore to demonstrate that microcredit is an effective instrument, now it is necessary to ask how to develop it more?”(Rodriguez & La Calle n.d.: 10). In order to improve this instrument, it is necessary to strengthen some variables, such as business and personal development training, and social capital. First, a better business training can help people to take more responsible decision about credit and improve their income and, consequently, their consumption. Secondly, it is important to foster more personal development training which improves living conditions in terms of empowerment and also social capital. Indeed, this would give people more power within its community. Finally, the promotion of social networks intra-groups and inter-groups improves living conditions in terms of social capital. Stronger and new social ties create a virtuous circle because they have positive impacts on income, well-being and empowerment. Nevertheless, as emerged from the case study, other services are necessary. Microcredit does not have remarkable impacts on education and health which can be improved through a greater support from the state.
This leads to the prospects to improve the services offered to clients. First of all, a better synergy between state and microfinance institutions would be beneficial for the improvement of poor people's living conditions. Indeed, considering the validity of microcredit, the state could promote investments and more cooperation with microfinance institutions. This would improve the synergy between them and, consequently, the delivery of better services to improve the economic and social condition of poor people. Moreover, another prospect is related to the synergy between microfinance institutions. In order to offer better products and services it is necessary that microfinance institutions could work with a cooperative logic and not competitive. This is necessary to reach a higher level of coverage, improve products and services directed to clients and avoid over-indebtedness of clients. A better integration between state, market and society would be advantageous for the improvement of poor people's living conditions.
In conclusion, microcredit offered by microfinance institutions with an integrated approach is a promoter of economic and social development. This instrument fosters cooperative and solidarity relations which incorporate the economy in social relations. Indeed, this type of microcredit promotes economic initiatives that not only satisfy economic needs but also the human and social ones. This creates a new kind of economy which places at the center the human being and his needs. “A socio-economy of solidarity as a way of life that encompasses the totality of the human being, that announces a new culture and a new form of producing to fulfill the needs of each human being and of the entire humanity” (The Latin Meeting on a Culture and Socioeconomy of Solidarity in Miller 2005).
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SITOGRAPHY
Biblioteca del Congreso Nacional de Chile website
Business Dictionary )
Chronic Poverty Research Center website
Direccion del trabajo website
Gobierno de Chile website
Grameen Bank website
Minsterio de Desarrollo Social website
Red para el Desarrollo de la Microfinanza en Chile website redmicrofinanzas.c
OECD website
World Bank Data website
ANNEXES
Table 1: A resume of social and economic conditions of interviewed people
*FPS:
**N.A.: not available
Table 2: resume of the impacts on income (1st part)
Table 3: resume of the impacts on income (2nd part)
F* The client closed the grocery store, where the income was mainly generated by the slot machines, because of the high competition and the arrival of games as Play Station and Nintendo.
** the client has a course on how to repair her equipment but not from a microfinance institution.
*** The client won a project with the public FOSIS and she bought a photocopier.
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[1] Village
[2] They correspond to 180 USD
[3] The original name is “Red Para el Desarrollo de las Microfinanzas en Chile”.
[4] One million Chilean Pesos is approximately 1,774 dollars (USD).
[5] 102,491 USD
[6] Chilean Microfinance Development Network
[7] The Spanish translation is “Banco Comunal” defined as a methodology with groups of minimum 10 people which gather at least once a month. The definition is quite blurred and nowadays there are various examples that can be defined Banco Comunal (Hatch
[8] FPS or Ficha Proteccion Social is an instrument which uses a score in order to identify people that are at the risk of get poor or that are already poor, so they can accede to social assistance from the Government (Gobierno de Chile website).
[9] FINRURAL is a Bolivian organization which group microfinance institutions with the aim of development and is committed to evaluate impacts of microcredit.
[10] Economic columnist of the Financial Times
[11] Karl Polany (1886-1964) sociologist and anthropologist (Encyclopedia)
[12] Ethan Miller
[13] Inhabitant of a village
[14] Professor of Economics who instituted the Grameen Bank, the Bank of the Poor.
[15] Village Banks: “Village banks are community-based credit and savings associations. They typically consist of 25 to 50 low-income individuals who are seeking to improve their lives through self-employment activities” (Grameen website)
[16] Poblaciones: popular urban quarters
[17] Popular Economy Organizations (PEOs): as mentioned in the theoretical section they are composed by “groups of pobladores in a given neighborhood [involved] in the production, consumption, distribution of goods and service of goods and services (Nyssens 1997: 176).
[18] The minimum salary in Chile is $210.000 CLP or 378 USD (Direccion del Trabajo website)
[19] FOSIS: Fondo de Solidaridad e Inversión Social created oin 1990 with the aim to reduce poverty and inequality (website: )
[20] In this paper, the term “self-employment” is utilized as synonym of micro-entrepreneur which qualify the predominance of personal work on other factors of the enterprise.
[21] The minimum salary corresponds to 210,000 Chilean pesos.
[22] Quarter or neighbourhood
[23] Polla: Chilean name for ROSCA
[24] With “participation” I mean the availability to joint consultation in decision making, goal setting, teamwork and other forms to increase people's commitment to collective objectives (Business Dictionary website )
[25] With “leadership” I mean the activity or ability of leading a group of people (Business Dictionary website )
[26] This theory was developed by the American psychologist Frederick Herzberg in 1959 under the name of dual-factor theory or motivator-hygiene theory. Here it is explained during an interview.
[27] Strong and Weak ties are part of the theory of Granovetter (1983)
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Source: World Bank Data
[pic]
Source: World Bank Data
[pic] Source: Razeto & Calcagni in Nyssens 2007: 177
[pic] Source: Gobierno de Chile 2011.
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Source: Author's formulation
EMPLOYMENT
CAPITAL
ENTREPRENEURIAL
KNOWLEDGE
INCOME
MICROCREDIT
CONSUMPTION AND SAVINGS
EDUCATION
HEALTH
HOUSING
MICROCREDIT
FAMILY
WELL-BEING
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[pic]Figure 1: GDP growth (annual %). Source: World Bank Data
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