Women and money

8 March is the centenary of International Women’s Day. This year, we mark the occasion with a series of blog posts about initiatives to strengthen gender equality worldwide. In this post, Flore-Anne Messy of the OECD’s Directorate for Financial and Enterprise Affairs  discusses women and financial education.

Elderly women in OECD countries are 30% more likely than men to be poor. Women receive $75,000 dollars less pension on average over their lifetime than men, despite living 5.6 years longer. But whatever their age, poverty rates for women in OECD countries are higher than for men.

It’s not just that women generally earn less than men. Where money is concerned, there are also big gender differences in knowledge and skills. Research in the US and other countries shows that women are less likely than men to give the correct answer to financial knowledge questions. They are also more likely to lack confidence in their own skills, be cautious investors, and to have insufficient funds for retirement. This cautious approach does have advantages but can severely impact on retirement funds. Studies in the US suggest that women’s retirement pots are, on average, a third smaller than men’s. (more…)

Microcredit: Borrowing freely


International Network of Alternative Financial Institutions meeting, Benin, 2007

Today’s post is from Mark Hannam, Chair of Fair Finance, a London based micro lender.   His writing is published here.

What’s gone wrong with microcredit? asked Brian Keeley on this blog last month, in response to the growing furore in India and Bangladesh surrounding the activities of micro finance institution.  Muhammad Yunus and the Grameen Bank are under attack from politicians in Bangladesh.  In turn, Professor Yunus has become more vocal in his criticism of commercial micro finance institutions, although the commercial firms continue to enjoy the support of a number of articulate and influential commentators.

It was always likely – and desirable – that microfinance would lose some of its lustre.  It never was the easy solution to global poverty that some of it cheerleaders claimed.  Nor has the discussion around the impact of microfinance been helped by the simplistic characterisation of charitable microfinance  as “good” and commercial microfinance as “bad”.   Good practice is good and bad practice is bad, irrespective of the financial structure of the company. 

Less attention has been paid to what might be called the political economy of microfinance.  What impact have micro finance institutions had on economic relationships in the communities in which they operate, with particular reference to the distribution of power?  Might the current crop of anti-microfinance stories have more to do with fear of changes to the power structure than with the level of interest rate charges?

Back in 1942, the American sociologist C Wright Mills wrote* that, “Not violence, but credit may be a rather ultimate seat of control within modern societies”.  Given the central role of credit in a modern economy, whether this be a Western urban economy or an Asian rural economy, it is not surprising that the control of credit matters both to borrowers and to lenders. 

Where credit is freely available, borrowing can be a purely commercial transaction.  In this case the cost of credit (the interest rate) and the service provided by the lender (the way the borrower is treated) are the two most important consideration.  Borrowers choose from whom to borrow based on the quality of service provided and the cost paid for the service.  If they don’t like the price or the service they can go elsewhere.

Where credit is not freely available, borrowing is often connected to a wider range of activities that are determined by the traditional social structures.  Wealthy families control the flow of money to their clients who, in return, are expected to do more than pay back capital with interest.  Client communities, which might include extended families or, in some cases, whole villages, are expected to work for their patrons and to vote for them at election time. 

Recent fiction by Daniyal Mueenuddin and Aravind Adiga capture the complexities of the power structures of these client communities and document the corrosive impact that they have on the lives of the poor.    In such communities the very idea of providing credit on a purely commercial basis is a direct challenge to the political status quo.

In many parts of the world quasi-feudal relationships between rich landlords and poor clients remain in place.  These social structures are also paternalistic, with women forced mostly into subordinate roles in education, in work and in politics.   It is in communities such as these that microfinance has had a revolutionary impact: credit is now available on purely commercial terms, without regard to traditional social obligations and gender roles.  Micro finance institutions are offering the poor a chance to borrow freely: they pay interest on their loans but that is the only price that they pay. 

Who has most to lose from the growth of microfinance?  The illegal loan-sharks for sure; poorly run state banks too; and, of course, those who benefit from political systems built on patronage, corruption, the buying of votes and the preservation of a culture of dependency. 

Today, micro finance institutions are under attack from members of the political elite in India and Bangladesh.  The only surprise is that it has taken so long for these reactionaries to start fighting back.   

* C Wright Mills, Power, Politics and People, p. 46, Oxford University Press, 1963.

Useful links

 OECD work on poverty reduction

 The OECD Development Centre

 OECD work on India

 The OECD Social Institutions and Gender Index (SIGI)

 Atlas of Gender and Development  

What’s gone wrong with microcredit?

Roses have thorns

Five years ago, microcredit was going to “put poverty in the museum”. The concept earned its creator, economist Muhammad Yunus, a Nobel prize and was hailed by aid workers, activists and journalists.

 Today, microcredit – or the provision of small loans to some of the world’s poorest people – gets less glowing coverage: News stories report that it is in “crisis” or a “mess” or “under siege”.   

 What’s gone wrong?

 To some extent, microcredit is a victim of its own success – a process many date to 2005 (which, perhaps ironically, was the UN’s International Year of Microcredit. What was once a niche – often charitable – activity became “a trendy asset class” for professional investors, according to the Financial Times. The numbers are striking – by 2009, the FT reports, “global microfinance had around $12bn in cross-border investment, up from $4bn three years ago”. Worldwide, borrowings are estimated to stand at $65 billion, against $24 billion in 2006.

 The origins of microcredit were more modest, and go back to Yunus and his Grameen Bank, which began as a research project in Bangladesh in the mid-1970s. Yunus’s idea was to provide poor people with small loans at reasonable rates, along with access to banking services and financial advice.

 Integrating poor people into the financial system was an innovation in itself, but Yunus went even further by targeting loans at women, who are often unable to borrow money for a combination of legal and social reasons. More than 90% of Grameen’s borrowers are women, most of whom use the money to start or build up small businesses. A repayment rate of over 95% made Grameen both a social and business success, and the idea went on to be copied across the developing world.

That was true of nowhere more than India, and it’s there where microcredit has hit the buffers. The BBC, and many others, have reported on a “suicide epidemic” among micro-loan borrowers. As more and more lenders entered the market, the initial focus on lending for business purposes faded. Instead, many borrowers took out home loans, and then faced intimidation from lenders to pay back the money. The deaths have fuelled a backlash, with opposition politicians in the Indian state of Andhra Pradesh urging borrowers not to pay back their loans. Repayment rates are reported to have plunged to 20%, and there are doubts about the financial soundness of some lenders.

Sounds familiar? The details may be different, but in a sense India has seen a credit bubble not unlike the subprime and mortgage bubbles that caused so much trouble in Western countries. The danger is that, in India’s case, the crisis will bring down the entire microloan sector, which would be a great pity, especially for people struggling to escape poverty. As The Economist notes, microcredit “is not a magic bullet, but nor is it intrinsically harmful”.

What’s needed to make it work better is a bit more realism. Yunus has doubts about whether microcredit should ever be offered by for-profit operators. “Poverty should be eradicated, not seen as a money-making opportunity,” he believes. However he also accepts that for-profits can play a role, but by focusing primarily on servicing the needs of the poor and not on maximising profits.

Realism would also help when it comes to assessing the impact of microcredit. Claims made for its social benefits at the height of the frenzy were probably overstated. Indeed, a study by Yale’s Dean Karlan suggests that in some cases microcredit can make it harder for people to set up new businesses because lenders primarily give money to existing business owners. 

Microcredit deserves to be seen as part – but only one part – of the solution to poverty. Other financial tools, such as providing poor people with savings accounts and insurance policies, also need to be more widely available.

Despite microcredit’s current woes, it would be a pity to throw it out. Drawing a parallel with the West’s financial crisis, development writer David Roodman argues that “you wouldn’t say that just because of the mortgage crisis, we shouldn’t have mortgages.”

 Useful links

 OECD work on poverty reduction

 The OECD Development Centre

 OECD work on India

 The OECD Social Institutions and Gender Index (SIGI)

 Atlas of Gender and Development  

The Pakistani floods: a note of guarded optimism

This post contributed by John Mutter, Professor of Earth and Environmental Sciences/Professor of International and Public Affairs and Director of PhD in Sustainable Development, Columbia University, NY.

 How will Pakistan do after the floods?

To answer that question we need first to know how bad the flooding was. It is widely said to be the worst in modern history and there is no reason to doubt that, but it’s not so easy to measure the magnitude of a flood. There is no widely accepted scale like the Richter scale for earthquake magnitude. Disasters are commonly scaled by deaths and economic losses.

The death toll for the Pakistan flooding is said to be around 2000. However, such figures are notoriously difficult to assess accurately because many people who are displaced don’t “report in”, making it hard to know who among the missing are alive or dead. The 2000 figure is probably the number of bodies recovered and is surely less than the true total. Even so, that’s still as high as the death toll from Hurricane Katrina, although it’s less than the number killed in other disasters in the region, such as the 70,000 victims of Cyclone Nargis in Myanmar.

Floods are not like earthquakes that give no warning. You can see a flood coming. It has to rain a lot over a long period of time and floodwaters rise over many days or longer. People can get out of the way and move to safer locations and that is what happened in Pakistan. The number of displaced people is thought to be enormous, far greater than the number displaced by the Indian Ocean tsunami of 2004. These figures too are hard to estimate with any accuracy but it is very safe to say that the death toll was mercifully low and forced displacement by contrast absolutely enormous.

Hard as these figures are to assess it is harder still to assess the economic impact of a disaster. Here there is often confusion added to the difficulty of estimation. What is often reported is so-called financial losses that, at least in the US tends to mean the value of that which is destroyed and the figures that come out quickly are insured property losses. Insurance companies usually know how much they have lost. But the very fact that property is insured says that it will be rebuilt without much financial hardship to the owner. Those losses don’t hurt an economy and can even stimulate a surge in the construction industry. As measures of economic set back due to a disaster they are very misleading.


Enriching our poverty measures

Click on the image to read what people affected by poverty say about it

This post was contributed by Kate Scrivens of the OECD’s Statistics Directorate. Kate is working on a project researching indicators of household vulnerability and resilience in OECD countries.

One of the most widely recognised  Millennium Development Goals (MDG) is halving the proportion of people living on less than $1 per day. And yet, how many of us have actually taken time to think about what that could mean, to live on less than $1 a day? Indeed, for most people in the developed world, this represents such a miniscule sum as to be almost meaningless. How can we better understand what life is actually like for the world’s poor?

A new international poverty measure – the Multidimensional Poverty Index (MPI) – devised by the Oxford Poverty and Human Development Initiative (OPHI) and the UNDP Human Development Report, goes some way to addressing this problem. A person may not be considered poor according to the traditional monetary threshold and yet still have woefully inadequate access to schooling, food, healthcare, electricity, water or decent housing.

The MPI takes these different dimensions into account, and finds significant differences between the income-poor population and the population facing wider deprivations. For example, in Ethiopia, only 39% of the population is counted as being income-poor using the $1.25-a-day measure (the $1 figure was revised to account for inflation), yet 90% of the population are “multi-dimensionally” deprived according to the MPI.

As the MPI directly measures the hardships experienced by individual households, it can give a much more nuanced picture of patterns within countries.  In Kenya, the overall poverty rates for the Kikuyu and Embu ethnic groups are similar; however the experience of poverty for the two groups is quite different. The Kikuyu suffer from higher rates of child mortality and malnutrition, whereas the Embu are more likely to face insufficient access to electricity, cooking fuel and adequate sanitation.

From a policy perspective, this kind of detail is crucial to be able to identify the challenges faced by different groups and to design effective solutions accordingly.

There are obvious links between lacking income and being deprived in a wider sense, and monetary measures of poverty remain very useful. However, poverty is a complex and multifaceted phenomenon – a reality that is sometimes obscured by income statistics. The availability of international comparable data of the breadth and depth of detail provided by the MPI can hopefully result in more informed policy and tangible change in the lives of poor people.

Of course, poverty is not just a problem for the developing world and the need for more comprehensive measures of household living conditions is increasingly being recognised in OECD countries too. The Stiglitz-Sen-Fitoussi Commission made recommendations in this vein last year, and surveys such as the EU Survey on Income and Living Conditions are starting to give a richer picture of poverty and social exclusion. The OECD publication Growing Unequal provides an analysis of non-income poverty indicators in OECD countries.

These developments are important because how we define and measure a problem dictates how we respond to it. By using a narrow definition of poverty, we risk ignoring large groups of disadvantaged people and implementing ineffective policy. Better data can provide a powerful (and much-needed) advantage in the fight against poverty.

Useful links

OECD Statistics Directorate

The OECD Progblog discusses progress.

Wikigender is a project initiated by the OECD Development Centre to facilitate the exchange and improve the knowledge on gender equality-related issues around the world.

OECD Insights on Sustainable Development

Chile, Haiti: The difference between 7.0 and 8.8, between 200 and 200,000

This post contributed by John Mutter, Professor of Earth and Environmental Sciences/Professor of International and Public Affairs and Director of PhD in Sustainable Development, Columbia University, NY, along with Belinda Archibong and Danni Pi, economics students at Columbia College.

Let’s imagine it is January 10th and I tell you that my seismologist colleagues and I have just found how to predict earthquakes. I can forecast that there will be two large earthquakes quite close in time, one of magnitude 7.0 in Haiti on January 12th and one of magnitude 8.8 in Chile on February 27th.

The well-known Richter scale measures amplitude of ground motion, not energy release; when comparing energy release, a magnitude 8.8 earthquake is about 500 times greater than a magnitude 7.0 earthquake, so those two are very distinct physical events.

But even though I can tell the time, location and magnitude of future earthquakes, even though I can rank them by their respective sizes, I don’t know how many people will die, or the financial losses, or any social outcomes. The difficulty to predict the consequences on the population constitutes an immense limitation to this imaginary forecasting.

How many people would have predicted that although the energy release was 500 times greater in Chile the loss of life would be a thousand times greater in Haiti –casualties were more than 200 in Chile, and in excess of 200,000 in Haiti. Also, how many would have suggested that looting would be so much greater a problem in Chile? (more…)