Essay: The strengths and limitations of providing microcredit and undertaking industrialisation in poverty alleviating process

Introduction
This essay is going to discuss the strengths and limitations between providing microcredit and undertaking industrialisation in poverty alleviating process. It will also analysis how these approaches help a country alleviate poverty and how it work in each economy field. Two countries will be used as example in this essay, which are China and Bangladesh.
Poverty is a worldwide problem that every country and economy want to alleviate it as far as possible. Because poverty plays a big role in a economy, it is the key factor of human development index and also a significant part in economy developing. According to the International Poverty Line Standard, almost 1 billion people were living in poverty. China and India took up half of it, which Indgia’s poverty population was 300 million (1st) and China was 150 million (2nd). China and India, as the two of the biggest economies in the world, their contributions for the economy development and poverty alleviation mean a lots to the whole world. So, here we will discuss the two approaches to alleviate poverty.
Bangladesh is still a developing country which national income per capita is only 1400 dollars in 2006. Although Bangladesh has been working for poverty alleviation, the poverty issue is still serious. 49.8% of population are living under the poverty line and 33.4% of them are extreme poverty.
Microfinance
The first approach we are going to talking about is microfinance. Microfinance is usually understood to entail the provision of financial services to micro-entrepreneurs and small businesses, which lack access to banking and related services due to the high transaction costs associated with serving these client categories(WIKIPEDIA.com). Basically, microfinance supply financial services to poor people and those services include loans, deposits and insurances etc. The core of microfinance is microcredit, which is supply unsecured loans to those people who have no income and jobs. This kind of ‘new’ financial service was started in 1970s and fast increased from 1997 to now. From 1997, microfinance had 618 institutions in global areas and untill 2004, with 40% annually increasing, there were 3000 institution and 80 million clients all over the world.
Why would microfinance be created? In 1970s, when Muhammad Yunus came back to Bangladesh, he found that people who suffered from poverty couldnot get loans from local banks. This situation made local people poorer and poorer. The reason that banks did not want to lend to poor borrowers is they thought that people in poverty have no income, jobs and credit, they also have nothing to mortgage. So, if banks lend them money, they were afraid of that they might not get this money back. So Muhammad Yunus invented this new type of financial services ‘microcredit’ which in order to help people get rid of poverty.
Microcredit’s Strengths :
1. Microcredit makes poor people have the same opportunities as rich people have, and do what they want to, participate normal business activities even use the loans as initial capital to run business. According to the research, polarization is one of the biggest problems in developing countries. As the country pay more attentions on economy growth, the inequility are more and more in income, employment and resources contribution. Meanwhile, the government does not have a perfect social institution to make these equal. As the result, polarization is being worse. With the appearance of microcredit, people in poverty are going to have a chance to have the same rights as rich people. Run business, do investment or just make family out of poverty. For instance, in 1970s Bangladesh, which was one of the poorest countries in the world, has Grameen Bank of Bangladesh. It is a microcredit institution and provide credit to poor households(Jonathan Morduch, 1999). This bank is rural bank because its most clients are from rural area or some poor people from the cities. Those clients 97% are female and have some skills for living. So, most of them would like to use the credit and their skills to make their life better. Here we can consider this as alleviating poverty starts from the poverty itself.
2. Joint liability group lending makes microcredit more efficient and high repayment rate. As we mentioned before, the main reason that banks do not want to provide credit for poor is they consider that poor people might not have ability to repay the loans. To deal with the same issue, the joint liability group lending is a good approach to make sure every borrowers can repay the money as soon as possible. Because the poor people have nothing to mortgage. So, wiith the joint liability group borrowers, everyone in the group is liable for each other, is joint liable. Which means if there is a member cannot repay her loans, rest members in the group have responsibility to repay her loans. If the group also couldnot repay the loans, all group member will be denied to access to future loan programmes. So, this method has kind of enforcement and monitoring within groups, and every member not only has responsible for herself, but also for everyone else. Besides, joint liability group lending also ensure the high rate of repayment, which is much higher than normal banks. For example, Grameen Bank of Bangladesh reported its repayment rate is 98%! Wenner(1995) indicates that repayment performance of groupes improves when groups have written rules stating how members should behave. In a word, joint liability group lending indeed can reduce the risk from the programme and ensure the future loans if the members can repay on time. Moreover, this approach can also reduce the cost of the lender, such as monitoring systems.
3. Different repayment method and rational interest rate. Differ from other traditional banks, microcredit serves for poor and the repayment method is also accepted by poor. For example, most banks will require you repay the all loans and interest on deadline. However, Grameen Bank of Bangladesh let you repay the money monthly or weekly as you want. It gives borrowers a kind of pressure in order to stimulate them work harder. This flexible repayment is much easier for poor than repay on deadline, because sometimes people may be difficult to repay such a lot of money at once. With this approach, those poor people are more likely to work hard for living, despite they have weekly or monthly repayment pressure, but it can also be a kind of stimulation. Then, people could get rid of poverty by themselves. However, for making sure that this new ‘bank’can last longer under the high risk of corporation and high cost of management, the interest rate in Grameen Bank of Bangladesh is higher than normal bank but most borrowers can afford it.
4. Micrcredit services can provide knowledge or informations to the borrowers, such as investment skills, business informations or help them to realize the financial market, even teach them some working skills. Grameen Bank of Bangladesh not just play functions of bank, it also like a charity, which provide clients technique excise. Some of excise are help clients learn a kind of skill, some others are make them know the financial market well and in order to choose the investment fields properly. All of these services are very helpful to improve the client’s quality and also highly decrease the risk of loans.
Microcredit’s Limitations
1. Lack of credit is not the only issue in poverty of developing countries. Food and water insecurity, lack of health and education services and gender inequality are serious issues as well. Majority poverty areas are rural and the health care services are so poor and inadequate. The death rate and rate of infectious disease are pretty high, which can cause human’s productivity low and lots of cost on medical. So, microcredit services are not very helpful to deal with issues like this.
2. High rate of repayment does carry with some issues. As microcredit providing them loans, the risk of repayment must be high. Joint liability group lending is a good method to get money back, but how about someone who cannot repay indeed? The institution will force borrowers to repay. (Jason and Kasia, 2008) They are forced to choose between protecting themselves, their homes, and their families and purchasing basic needs. As one recipient put it, ‘They use many kinds of force to get their money back’ torturing people or dragging people’ it is a serious injustice. Say I tell the field officer ‘I can’t give you the installment today, my child is sick.’ And then I bring the doctor to my house and he is sitting and giving my child medicine. Then the field officer comes and says ‘why can you buy medicine for your child, but you can’t give me the installment’? What kind of a way is this to treat anyone’? So, does anyone want to get microcredit like that?
3. One loan carrys another loan. Despite microcredit provide every thing they need, what if the recipients do not have money to repay their loan? Within the pressure from others in the lending group, they have to get another loan from other institution to repay the previous one. (Jason and Kasia, 2008) With eight microloan providers in a village of approximately 1500 house-holds, it is fairly common for house-holds to have upwards of four loans at any given time. In this situation, people who live in poverty is going to be poor and poor, and their loan pressure would be higher and higer.
4. Gender inequality is still an serious issue. As we all know, gender inequality always exist in undeveloped countries. Microcredit of Grameen Bank’s main client is woman, seems like that woman get loans make the issue more equal than before. However, the truth is, in most family man is the one who make decisions. As a respondent said: ‘Women take microcredit as their husbands order them to do so. When their husbands fail to pay the installment, then NGO workers abuse the women a lot.’ (Jason and Kasia, 2008))
5. Although the Grameen Bank of Bangladesh is the beginner of microcredit and successful in poverty alleviation. It still have not achieve sustainable in accounting. Despite the Grameen Bank created 1.5 million profit during 1985-1996, but the resource of profit was from donors(16 million), soft loans(81 million) and equity(47 million) from shareholders. So, commercially speaking, as a bank that rely on donations is hardly to be sustainable and expand its business field in the world.
Industrialisation’s Strengths
As the second biggest economy, biggest export country and second import country in the world, China really did lots of work on industrialisation process. As the most populous country in the world, China created $7298 billion GDP in 2011, but basis for the huge population, the national income per capita was only $5413 in 2011. Industrialisation development is the main purpose of economy from 1980s till now, which really help China increase economy and alleviate poverty to some extent.
1. More opportunities are created in industrialisation process. Traditionally speaking, the algriculture is the core source of economy in the past time. As the industrialisation playing an important role in economy, more jobs, high income, more opportunities and high level of productivity are full of the country. Meanwhile, people in poverty have chances to change their life by taking industrial jobs or learning useful skills rather than relying on algriculture.
2. Most industrialisation processes start from urban areas and that would lead a migration from rural areas to city, so called urbanisation. At the beginning of 1980s in China, Chinese economic reform issued as a basic policy by the country’s leader. It is an significant policy which aimed to let some cities develop first. All that cities are seaside and located in east and southeast of China, include Shanghai, Shenzhen and Guangzhou etc. Goverment gave them lots of supports to develop industry and manufactory. As the result, those cities have developed with really high speed and also lead China to growth on economy fastly. With the high speed on economy growth, rural people tended to migrate from rural to urban. The production mode changed from algriculture to industry and quality of life became normal. According to the reasearch, befor the Chinese economic reform, average urban population in China was 5 million. Ten years later, it grew to 10 million and 15 million with another 10 years later. Nowadays, average growth of urban population is 20 million a year(Baidu, 2012). According to the Harris- Todaro(1970) model, people rationally decide whether to migrate from agriculture to industry based on the expected wage. High income becomes the biggest motivation for rural people to migrate from rural sector to urban sector. As graph shows below: migration only happens when a < [m/(N-n)] x b.
3. Life style will change in industrialisation process. Before industrialisation process, most undeveloped countries even some developing countries, algriculture productivity occupied a high percentage on GDP. As more and more factories, jobs and industry secotors existing in cities, rural people give up algriculture voluntarily and try to find their own positions in industry sectors. Because living in urban, indeed, they have more job opportunities and higher income than in rural. Especially most families in rural have more than 1 child, life pressure make them to work in urban. In 2010, the disposable income of urban people is 19109 RMB and rural people is 5919 RMB(Baidu.com).
4. The whole economy structure will be changed. Under the undeveloped economy, algriculture was the first productivity and labour force was the main method to produce. The factors of that are inefficient, labour waste, low productivity and low rate of return. Changing to industrialiastion, machines replace with labour and technologies make factories more efficient and high productivity. Then, the rate of return would be high and firms and factories would be profitable. As the result, worker can get higher income, especially for those people who came from poverty, higher income could be a good sign to get rid of poverty.
Industrialisation’s Limitations
Migration not only means the changing on productivity mode, also lead to a large migration of population. With the large number of population moving from rural to urban, which in order to pursue a better life. The life pressure in urban are much higher than before. A lot of issues happened, such as increasing of population density, pollutions and all kind of economical unbalance.
1. Industrialisation changes the mode of productivity, but it also needs lots of cheap labour force. In fact, the wage level between rural people and urban people are different, the first one is much cheaper. That is why factories ranther recruit rural labour force. After rural people came to the city, in short run, the CPI would go up and the rent and house price would increase as well. Besides, their children need to go to school and China government feel a lot of pressure for that because there always be inadequate schools in urban and there are still lots of children are not in school. For instance, in Beijing, if you are not registered permanent residence(rural people and people do not buy houses in Beijing), the children cannot take upward educations after secondary school(ifeng.com).
2. Industrialisation must be developed in urban first, then expand to rural. However, because of different cultures and basic of economy, polarization are getting worse. For instance, lots of rural people did not take enough education. They are not good enough in innovations or running business by manufactory. Meanwhile, the urban people are taking the chance to do so. As a result, polarization exists and getting worse, people in rural are still in poverty and urban people are being rich.
3. Large number of people migrate from rural to urban make many economy system unbalance. For example, before migration, urban is developing with its own tempo. After that, the employment equilibrium would be broken with the big change on urban’s population. Lots of rural people are fighting with urban people for the same job. Rural people are always winner because they can accept lower wage level which urban people cannot. So, in long run, urban employment would be higher. Moreover, large rural population in city can lead rent to increase. In 2010, average living for rent in Beijing were increased by 18.5% than 2009(Renmin.com). Sometimes, it causes some urban people cannot afford it anymore.
4. Child labour issue are getting worse. There are around 246 million children worldwide who are working. In China, around 2-3 million child labour are working. This issue does not caused by industrialiation but it is closed relevant with poverty. With industrialiation began, jobs and opportunities were increased and migration from rural to urban happened. Most rural families have 3-4 children. They came to the city with parents, if they do not have school to go, they need to find a job for living and reducing the life pressures as far as possible. According to the research, 1990s in China, there were 10 million migrant workers and 20% of them under 16(blog.China.com.cn). Most of them were ordered by their parents because parents earned not enough for a whole family living in urban.
Conclusions
Poverty can be alleviated by microcredit and industrialisation, but both of them have strengths and limitations. Microcredit provides loans by supporting them money directly and the way they did is really acceptable for poors. Nevertheless, the causes of poverty and issues it caused are not just lacing of money, also include inequality, education problems and lacking of health and medical care. Those are issues that microcredit cannot solve. In addition, although industrialisation achieved a important productivity movement from algriculture to industry, increase economy development and boost urbanisation. The issue that caused by migration also need to be considered in further development. Such as urban life pressures go up, urban employment increase and child labour etc. So, perfect policy does not exist, to get a good result, it must work together with all kinds of policies.