Thursday, May 1, 2014

Week 7: Microfinance and the Links Between Health and Economics

Coming into this course, I was much more familiar with the field of microeconomics than that of macroeconomics.

Microeconomics is concerned with the economic activities and tendencies of individual entities driving markets such as individuals, families, businesses, organizations, groups and countries.  It looks at the smaller individual pieces of a much bigger puzzle, like me and my habits, which makes it a more relatable topic to me personally.

In Uganda I spoke with workers from a microfinancing sacco (a small savings and loan cooperative) and was introduced to the benefits of providing small loans with low interest to people in developing countries.  My education began with the basics:

  • Small loans are essential to help individuals and families set up small business enterprises like farms or shop stalls (so they can buy equipment and or stock, pay the initial rental fees, etc).
  • Small loans can also be used for education and the acquisition of skills or healthcare if illness has become a problem and is interfering with productivity.
  • Small loans help to establish independence and security by optimizing self-sustainability so that people can work to provide for themselves instead of relying on charitable donations.
  • Banks in developing countries do not typically provide small loans as it is usually not worth it for them.  In addition, banks generally require collateral to lend out money, which is something that poor people in developing countries rarely have.
  • In the absence of bank loans, many desperate people in developing countries have no choice but to turn to aggressive loan sharks who charge incredibly high interest rates and may threaten or even enact violence if payments are not made on time.  This can place these individuals and their families at great risk and dig them into an even deeper financial hole than where they started.
As I learned more, I came to know that microfinance was initially called microcredit and in 2006, the Grameen bank in Bangladesh won the Nobel Peace Prize for its groundbreaking work providing small loans to the poor (Karim 2011).  One of the primary reasons it has received so much praise is because of the opportunity it provides to women to become more financially independent in traditionally very patriarchal societies, thereby helping to elevate the status of women and improving equality.  I learned that the sacco in Uganda reported much higher recovery rates from women, that is to say that compared to their male counterparts, female clients are better at bringing in their payments in full and on time.  Upon further reading, I found that banks in Bangladesh including Grameen also reported remarkably high recovery rates (around 98%) from its female borrowers (Karim 2011). 

Of course, the push for widespread microfinancing in developing countries has received criticism, as with any development strategy.  The truth is that being a small business owner is difficult anywhere, in rich and poor countries alike.  Therefore, it is understandably difficult to see how helping people become small business owners will actually improve their circumstances and translate to increased development.  But, in the absence of sprawling department store conglomerates in low income nations, small businesses are the only ones providing goods and services to most communities (especially those that are smaller and more rural).   A fact that gives that much more gravity to the saying "small businesses are the backbone of an economy".

There have also been criticisms surrounding the real benefit for female borrowers for a couple of reasons.  First of all, some women are forced to surrender their loans to male family members in such male-dominated societies like those in Bangladesh (Karim 2011).    Associate professor of anthropology at the Univeristy of Oregan Dr Lamia Karim, was highly suspicious of the astonishingly high return rates reported by the Bangladeshi banks.  Upon further investigation Karim found that women were being publicly shamed if they defaulted on a payment, a practice she considered to be driven and encouraged by the NGOs helping to provide the loans (2011).  Due to the fact that women are valued for bringing honor to the family, Karim reports that applying this sort of societal pressure is extremely effective in getting people to not only make their loan payments on time, but to also manage their spending more carefully so that they can (2011).  In short, these are perfect examples of how cultural norms and corruption can sometimes nullify, significantly diminish or alter the effects of development efforts.

Unfortunately, no development strategy is perfect, but aid has not been very successful at improving circumstances in low income countries, particularly those in sub-Saharan Africa so we need to try something else.  Plans work best if they are multi-dimensional and address issues from a number of angles (for example from a cultural perspective).  Therefore, we should not completely discount microfinancing as a big part of the solution to extreme poverty in developing nations simply because there are some glitches with the programs rolled out in Bangladesh.  Strategies need to be reevaluated over time after being implemented and adjusted to properly fit communities.  It must also be acknowledged that economic progress in developing countries will take time and true long-term impacts and trends will take a while to become visible.

At least in the short-term, there is evidence that small loans in Bangladesh have a smaller than originally expected but still positive impact on: school enrollment for both boys and girls, labor supply (hours people can and want to work) and individual expenditure per capita (Chemin 2008), all of which are good for the economy.  We cannot forget that small credit loans are not only for businesses, they can also be used for furthering education, improving people's homes to make them more sound and other investments that can help make people safer, healthier and more productive.

Coming back around to the spending habits of individuals, one of our activities in class was to break down what we ourselves typically spend on food into product groups.  In other words, what proportion of the total money we spend on food at the grocery store is spent on: meat; dairy; fats; sugars; fruits and vegetables; and grains?

Initially, I estimated that our spending would be split in the following manner:
  • Meat and nut products - 40%
  • Dairy - 15%
  • Fruits and vegetables - 15%
  • Grain - 25%
  • Saturated fats and sugars - 5%
The majority of the students in our class admitted, just as I did, that meat would account for the biggest proportion of their overall spending.  I was curious about how accurate my estimation was so I took a look at a receipt from our big shopping trip on the weekend.  The actual breakdown was:
  • Meat and nut products - 52%
  • Dairy - 18%
  • Grains - 14%
  • Fruits and vegetables - 10%
  • Fats, sugars and oils - 7%
I was very surprised at how much we really spend on meat and nut products and a bit disappointed with how little we spend on fruits and vegetables.  Ultimately though, my initial estimate was not very far off and I was happy to see that I got the order of what we spend the most on to what we spend the least on correct. 

Next we were asked to put ourselves in a position where our finances were strained and to consider what kind of adjustments we would make to our spending on food.  Many, including myself, said that we would spend less on meat and sugars and more on grains.  Our reasoning was that grains are filling and less expensive, so we would buy more of them instead of meat which tends to be very expensive.  We also decided that if we were tightening our purse strings, luxuries like sweets should be cut down or eliminated all together.  I also opted for spending a bit more on fruits and vegetables because they are rich in vitamins and minerals and I would want to try and stay as healthy as possible.

I was shocked to learn that in actuality, the majority of people who find themselves in this situation struggle to cut relatively superfluous luxury items from their shopping list and instead cut from other areas.  Apparently it is more difficult for people to let go of the items that they really enjoy, so they are willing to sacrifice elsewhere to keep the things that make them happy, the things they have become accustomed to.  I was also surprised to find out that when the reverse happens, that is to say that people start making more money and have more to spend, they too struggle to adapt.  Even though they have are able to buy healthier, better quality foods, people who have recently come into more wealth will often go on eating the same cheaper foods for an extended period of time, even if they are unhealthy.

After thinking about it for a while, I understood why making these kinds of economic transitions might be challenging for some people, even if it is difficult for me to relate to.  I grew up in a one-parent household and what little money we had was spent on healthy food because my mom believed that it was worthwhile.  I adopted my mother's way of thinking very early on and it has stayed with me throughout my various financial circumstances.

I tried to look for research surrounding the claims that we heard in class to better understand the background and measures and came across an article relating to spending changes later in life.  In 2013, Aguiar and Hurst reported that in later years, spending on essentials such as food, transport and personal care decrease while spending on nonessentials like entertainment, charitable giving, utilities and domestic services remain the same.  This, despite the fact that these people are retired or heading into retirement and will have less income.  The authors postulated that these findings could be explained by a number of things including the fact that later in life people spend less money driving or taking transport every day to and from work, less money on work clothes, etc.  The authors also discuss time as a factor; older people typically work less or not at all and have more time for other enjoyable pass-times.  There's also the possibility that as they reach the end of their lives, they want to live life to the fullest and be happy.

The topic of how retirees spend their money is quite different from looking at the behaviors of people in financial transition for other reasons, but I believe there is a common underlying thread.  At the end of the day, people like spending the money that they have on things that make them feel good even if it is economically irrational.  For someone who has just lost a high paying job that might mean squeezing their finances elsewhere so that they can still have that steak dinner that they have come to enjoy on Saturday nights because it is worth it to them.  For someone who has just received a promotion maybe it's still eating that cheeseburger from the fast food shop on the corner twice a week because that is what they are used to, it is familiar, comforting and they like the taste.  Finally, for someone who is newly retired, maybe it's going to the museum to enjoy art or making a donation to a charity for sick children to feel like they are contributing to society.  Perhaps it also comes down to individuals having a hard time believing or accepting that their circumstances have changed, so they do things to convince themselves (or even the outside world) otherwise or to distract themselves.

Understanding illogical spending habits is still difficult for me at this stage, but I feel like I am getting better at it.


Aguiar M & Hurst E 2013, 'Deconstructing Life Cycle Expenditure',
 Journal of Political Economy, vol. 121, no. 3, pp. 437-492.  Available from: <>. [1 May 2014].

Chemin M 2008, 'The Benefits and Costs of Microfinance: Evidence from Bangladesh', The Journal of Development Studies, vol. 44, no. 4, pp. 463-484.  Available from: <>. [1 May 2014].

Karim L 2011, Microfinance and Its Discontents: Women in Debt in Bangladesh, University of Minnesota Press, Minneapolis.

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