The poverty trap

How do you solve a problem like world poverty? Not with microfinance, says Jason Hickel, anthropologist at the London School of Economics – and the UN’s newly-minted sustainable development goals don't offer much hope either

Why has microfinance failed to tackle poverty?

Here’s what I see: microfinance has become an extremely popular and powerful tale about how easily we can eradicate poverty, but it turns out there is no net positive impact from it. Why is it so powerful? Because it promises an apolitical solution to poverty. For the most part, the microfinance industry is dominated by microcredit – all you need to do is give a bit of money to the poor on the promise that it will come back to you with returns, so you can solve poverty while making money from it. Of course it’s incredibly beguiling. Access to banking is important; people do need fair ways to store their money and there shouldn’t be discrimination when it comes to accessing financial services. But microfinance reframes poverty as a private, rather than a public, priority – the claim is that once the poor have access to credit they have no other excuse for remaining poor.

"If you engage in direct cash transfers, it improves demand in local economies and allows entrepreneurship to really thrive" What tools could be more effective?

The evidence in favour of direct cash transfers is compelling. One of the reasons why microfinance fails is that when small businesses launch, they encounter a lack of consumer demand. Poor people just don’t have any cash to buy the stuff these businesses want to sell. If you engage in direct cash transfers, it improves demand in local economies, and allows businesses and other forms of entrepreneurship to really thrive.

This is better for everybody. It’s not charity that is a loss to society, but a way of reducing the massive costs that come with the bureaucracy necessary to manage massive poverty, which is a drain on human potential.

The level of cash transfer you need to make a massive difference is extremely small. Just between $1 and $2 a day can be the difference between being in or out of poverty. There’s interesting research that suggests poor people need at least $5 a day to achieve anything approaching normal human life expectancy. International NGO ActionAid and other key charities are calling for a poverty line closer to $10, which is the highest line used by the World Bank.

What needs to be done to eradicate poverty?

The only meaningful way to address poverty is to address the deeper structural determinants that produce it in the first place. But the problem is, they require political will. We have to see an end to structural adjustment loans, what they now call poverty reduction strategy papers; recent statistics show that global south countries collectively lost in the region of $480bn in GDP per year during the 1980s and 1990s as a result of IMF and World Bank structural adjustment conditions.

We also need fairer mechanisms in finance for the global south, and an end to land grabs. And we have to end the tax haven system and illicit financial flows that evacuate around $1 trillion from the global south each year.

Will the new set of UN-backed goals get us there?

I think it is possible to eliminate poverty by 2030, but not on the current plan laid out by the Sustainable Development Goals (SDGs). It’s hard to say we should ignore the SDGs, but I think that we should.

One of its big problems is that it relies primarily on GDP growth as a way to eradicate poverty, yet the poorest 60 per cent of humanity receives only 5 per cent of global GDP growth. So if we want to eradicate poverty through growth, we’re going to have to grow the global economy by around 100 times its size, which isn’t possible in a climate-constrained world.

The only real option is to confront inequality, something Global Goal 10 does not do adequately. We should instead look to the tools global south countries used so successfully in the 1950s and 1960s, such as government subsidies for infant industries, redistributive mechanisms within the population, and high spending on education and healthcare.

What about philanthropic organisations, what can they do?

The whole framing of aid is wrong. It suggests rich countries are reaching out across the chasm to give poor countries a leg up. But if you look at the flow of resources, the poor world is sending much more to the rich world than vice versa. Instead, aid and philanthropy organisations can use their power and voice to start calling for direct political interventions in the structural drivers of poverty. The truth is, until we start doing that there’s no hope.

Photo credit: Curt Carnemark/World Bank