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17 Chapter One The Political Economy of Microfinance Milford Bateman Introduction Researchers in the international development policy field, notably James Ferguson (1990) and James Scott (1992), show that a yawning gap generally exists between the declared objective of any particular policy intervention and the hidden political agenda that lies behind that intervention. The purpose of this chapter is to explore aspects of the largely hidden political agenda that emerged first to help establish the contemporary microfinance model as one of the most popular antipoverty interventions of all time and then to sustain it in spite of its ineffectiveness. Rather than portraying microfinance as a way of helping developing countries to create sustainable economies and meaningfully reduce poverty, as is still the conventional wisdom, I use the accumulated evidence to point firmly to another conclusion: microfinance gained its initial support and then became a dominant feature of international development policy in the longer term largely because it could be, and was, deployed to legitimize, maintain , and extend the global neoliberal project. The Background The act of providing small sums of capital to assist the poor has a long and distinguished history. Many Asian and African countries have long used small loans as a way of tiding over poor individuals in times of need. In the sixteenth and seventeenth centuries, so-­ called Friendly Societies emerged across Europe to provide loans and other forms of support for a large percentage of the poor. In mid-­ nineteenth-­ century Germany, Friedrich Wilhelm Raiffeisen and Franz Hermann Schulze-­ Delitzsch established the worldwide cooperative banking 18 Milford Bateman and credit union movement to provide the poor with a wide range of services, including small low-­ interest loans for productive purposes. At anything other than a trivial level, however, this rich history of transformational ideas and institutions actually has very little to do with the contemporary microfinance phenomenon. In this chapter I argue that the huge well of support for the contemporary microfinance model within the international development community can be traced back to the 1960s, to the period of Cold War politics that pitted the United States against the former Soviet Union. From the end of the First World War onward, the US government’s preferred capitalist model for developing countries , as in the United States itself (Gilens and Page 2014), essentially involved a small domestic, capitalist elite in effective control of the government. The US government ensured this outcome throughout the developed world by mobilizing money, connections, and military might and was generally supported by elite ownership and control of the most important enterprises and media outlets (Miliband 1969). Sometimes a democratic electoral system was tolerated when it produced the right result (returning elite or elite-­ backed politicians to power), but, as extensively documented by scholars such as William Blum (2005), these systems were routinely overthrown by the US government and its allies when theydid not. Business and political elites in developing countries were at all times expected to closely adhere to US foreign policy goals, including the willingness to suppress communist, leftist, and democratic-­ popular movements. Developing countries were also expected to give US corporations unimpeded access to their natural resources, labor pools, and markets. In return, the US government and military supported a developing country’s domesticelite, protecting theelite from the rest of the population and the threat of genuine democracy. But no matter the effort to achieve a sustainable outcome along these lines, the US government was forced to face down or contain many attempts in developing countries to build popular, democratic, pro-­ poor alternatives to US hegemony and US-­ led capitalism, especially in the United States’ self-­ described backyard: Latin America (Green 1995; Schoultz 1998). Latin American resistance to US influence largely involved, as Noam Chomsky (1992, 49) famously noted, “labor leaders, peasant organizers, priests organizing self-­ help groups, and others with the wrong priorities.” In response, the US government worked with many of Latin America’s military dictatorships, especially through its infamous School of the Americas (Gill 2004), in order to identify as many of the The Political Economy of Microfinance 19 most recalcitrant individuals and institutions as possible before subjecting them to pressure, harassment, and, oftentimes, extreme repression and violence.1 However, such an openly aggressive approach has its practical limits and obvious potential for unpredictable negative consequences, what Chalmers Johnson (2000) famously termed “blowback.” Thus, in the early 1960s a parallel, gradualist strategy—known as “winning hearts and minds”—began to evolve within US government policy circles. Later coined...


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