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Article Artículo

Bolivia

Latin America and the Caribbean

Mexico

World

Latin America’s Tragic Engagement with Microcredit

Thirty years ago, the international development community was abuzz with excitement. This was because it appeared that the perfect solution to poverty, exclusion and under-development had finally been found in the form of microcredit. As originally conceived, microcredit is the provision of micro-loans to the poor to allow them to establish a range of income-generating activities, supposedly facilitating an escape from poverty through individual entrepreneurship and self-help. Perhaps nowhere more than in Latin America was the excitement so intense. Stoked by the uplifting claims of Peruvian economist, Hernando de Soto [1], that a vastly expanded informal economy would prove to be the economic salvation of the continent, the U.S. government through the World Bank and its own aid arm, USAID, along with the Inter-American Development Bank (IDB), led the charge to establish the microcredit movement as the dominant local intervention to address poverty.

However, the sour reality that Latin America faces today is that all the excitement over microcredit was fundamentally misplaced. As I argue in a recent article [PDF] published in the Mexican journal Ola Financiera, the microcredit movement has likely proved to be one of the most destructive interventions brought to Latin America over the last 30 years. A growing number of Latin American governments and international development agencies are now finally reconsidering their once unconditional support for the microcredit model. So what went wrong? Let me point to a few of the most important problems.

First, the overarching outcome of the microcredit model in Latin America has been an increase in the supply of “poverty-push” informal microenterprises and self-employment ventures. Yet rather than creating a De Soto-esque foundation for rapid growth and poverty reduction, the very worst possible foundation for promoting long-term poverty reduction and sustainable development was created. As economists such as Alice Amsden, Robert Wade and Ha-Joon Chang have convincingly shown, the now wealthy developed countries and the East Asian “miracle” economies found that what is really needed to escape poverty is for the state to engineer an entirely different constellation of the “right” enterprises: that is, enterprises that are formalized, large enough to reap important economies of scale, can innovate, can use new technology, are willing to train their workers, can supply larger enterprises with quality inputs, can facilitate new organizational routines and capabilities, and can eventually export. Economic history shows, too, that financing the expansion of the “wrong” sort of informal microenterprises and self-employment ventures will simply not lead to sustainable development. As Ha-Joon Chang brilliantly points out, Africa has more individual entrepreneurs than perhaps any other location on the planet, and many more are being created all the time thanks to rafts of microcredit programs backed by the developed countries, yet Africa remains in poverty precisely because of this fact. Likewise in Latin America: by programmatically channelling its scarce financial resources (savings and remittances) into informal microenterprises and self-employment ventures, and so away from virtually all other higher-value uses, the continent has actually been progressively destroying its economic base.

CEPR and Milford Bateman (guest post) / July 23, 2013

Article Artículo

Workers

Class Power and Labor’s Falling Income Share

Between 1979 and 2007, the share of national income going to the top one-percent of wealthy households grew from 9.6 percent to 20 percent. This shouldn’t surprise even the most casual consumer of economic news. Many scholars attribute this upward redistribution of wealth in part to a decline in labor’s share of national private sector income and an increase in capital’s share. Labor’s share of income, which has historically hovered slightly above 50 percent, has fallen 6 percentage points across the U.S. private sector since the late 1970s. Since capital income is concentrated among wealthier households, a relative increase in capital income benefits the richest households most of all.

In her June 2013 paper, “The Capitalist Machine: Computerization, Workers’ Power, and the Decline in Labor’s Share within U.S. Industries,” social scientist Tali Kristal focuses on the role unions play in this phenomenon. Kristal introduces the theory of “class-biased technological change,” which states that decades of technological change precipitated the decline of labor unions and weakened workers’ ability to bargain for a larger piece of the economic pie. First, new technologies lead to job losses in previously highly unionized sectors, like manufacturing, as work becomes more mechanized and production moves to lower-wage regions around the world. New technologies require new skills, a fact which can create a wedge between workers with and without those skills, polarize wages, and degrade workplace solidarity. Moreover, Kristal argues, new technologies empower employers to exert greater “technocratic control” over employees and engage in union-busting tactics. Drawing on the belief that class struggle drives the income distribution process, Kristal concludes that a shift in the class’ relative power leads to a shift in relative income.

Alternative theories attribute labor’s declining income share to factor-biased technological change: as new technologies improve a firm’s productive capabilities, the returns on equipment grow relative to the returns on labor, incentivizing producers to substitute labor for equipment. Using data on capital investment, compensation, unionization, and import penetration by low-wage countries, Kristal finds some evidence to support this.

CEPR and Sheva Diagne / July 23, 2013

Article Artículo

Argentina

Europe

Latin America and the Caribbean

World

Spanish Newspaper ABC Runs a “Completely False” Report on Venezuela, Again

ABC, the far-right newspaper in Spain, has again been caught running a false report related to Venezuela. On July 18, the paper reported that Secretary of State John Kerry had phoned Venezuelan Foreign Minister Elías Jaua and told him that the U.S. government was enacting a raft of sanctions against Venezuela for its having offered political asylum to whistle-blower Edward Snowden. The punitive measures, according to ABC, included revoking the visas of senior officials' and Venezuelan businessmen’s “associated with chavismo” (which the paper reported had already begun a week earlier), and suspension of U.S. exports of gas and oil derivatives to Venezuela. The paper also reported that Kerry had informed Jaua that the U.S. would not permit any Venezuelan plane suspected of carrying Snowden to fly over either U.S. or NATO-member country airspace, unless the plane was a presidential flight carrying President Nicolás Maduro himself. “Immunity is not for the plane, but the president,” ABC’s “sources” cited Kerry as saying.

The report was picked up by a number of Venezuelan media outlets, including the opposition-oriented El Universal, the Miami-based Venezuela Al Día, and even what is widely considered Venezuela’s most objective newspaper, Últimas Noticias. U.S. English-language media outlets were more cautious, with only UPI running an article summarizing the ABC report prior without waiting for verification from the State Department.

But AFP reported on Saturday:

State Department spokeswoman Marie Harf confirmed that Kerry spoke about Snowden by telephone on July 12 with Venezuelan Foreign Minister Elias Jaua.

But she denied as "completely false" a report in the Spanish newspaper ABC that Kerry had threatened to suspend sales of gasoline or oil products to Caracas if it granted Snowden asylum.

"The secretary made no reference in his conversation with Foreign Minister Jaua as to what our response would be if Venezuela were to assist Mr. Snowden or receive him," she said, reading from a statement.

CEPR / July 22, 2013