Creating Jobs in recession-hit Communities in Europe: Why Microcredit will not help

As the jobs crisis continues to escalate right across Europe, the European policy-making elite is at an almost complete loss as to what to do. However, there seems to be broad agreement that at least one policy intervention can work in today’s desperate circumstances – microcredit. A policy that is more familiar to developing countries, such as Bangladesh and Bolivia, microcredit is increasingly being positioned as one of the key local solutions to European joblessness. There is much optimism that what supposedly ‘worked’ in developing countries, can now work for recession-hit Europe too.

This interest in microcredit is perverse. The programmed expansion of microcredit in Europe is likely to prove to be part of the problem holding back sustainable job creation and development, and not the solution. When discussing the role of microcredit, the assumption is always made that no matter how many microenterprises are helped into life thanks to microcredit, sufficient local demand will automatically arise to absorb this additional local supply of simple items and services. Even in good economic times this understanding is fundamentally mistaken: but in very bad economic times, like today, it is almost criminally wrong. Today in Europe we find that simply cramming more and more informal microenterprises into the same depressed economic space does not work at all. Why not?

First, microcredit programs are almost all leading to serious ‘displacement’, which is where new microenterprises only survive by tapping into the local demand that up to then was underpinning incumbent, and struggling, microenterprises. Thanks to many new microenterprises, most of the hapless individuals already struggling to survive in the microenterprise sector are faced with greatly reduced turnover, leading to lower margins, wages and profits. This also means that the few individuals that might be employed by these incumbent microenterprises will also have to be dismissed. Further, the artificial increase in supply also tends to depress the prices of the local goods and services in question, thus negatively affecting all new and incumbent microenterprises in terms of their margins, profits and incomes.

Then there is the related problem of microenterprise failure. Even more than small or medium businesses, microenterprises are ‘unemployment-push’ by nature, and so we tend to see a very high failure rate of such business units. With such large failure statistics, this means that into the longer term almost all microcredit programs generate far less sustainable job creation than is typically advertised. We saw this in the UK in the 1980s when the many programs designed to bring back jobs to collapsing coal and steel communities in reality produced only a tiny number of sustainable jobs.

In short, all too often microcredit leads to an unproductive process of local ‘job churn’, with no real net employment gain registered whatsoever. Moreover, because conditions deteriorate in the poorest communities as microcredit encourages hyper-competition between new and incumbent microenterprises, it is the very poorest micro-entrepreneurs that actually ‘pay’, through reduced incomes, for whatever limited job creation actually results. This is hardly the fairest outcome.

Nonetheless, the European Commission (EC) is heavily promoting a new €100 million microfinance fund which it hopes will promote a new raft of microenterprises in the worst recession-hit locations in Europe, and so create new jobs. But with virtually all EU countries now seeing their existing microenterprise sector dramatically contracting thanks to a decline in local demand, the vast majority of new micro-entrepreneurs are going to find it almost impossible to identify new sources of local demand with which to begin and to grow.

In Greece, for instance, the dramatic fall-off in local demand has meant more than half of its existing microenterprises and small businesses – cafes, small retailers, bars, fast food joints, etc – are today unable to meet their payroll, laying off employees or closing down. The same downward spiral holds for most EU countries, notably in Spain, Portugal, Italy and the UK. It is therefore a cruel fantasy to expect new microenterprises to be able to take root in the very same communities which are already hemorrhaging incumbent microenterprises at an astounding rate.

The same fundamental mistake is being repeated on the periphery of Europe. As even a cursory glance at CNN or Al Jazeera will have shown, the brave young people behind the Arab Spring uprisings in North Africa are not just calling for the overthrow of dictators, but also for ‘real jobs’ – that is, jobs that are meaningful, dignified, secure and make use of their high level professional skills (often expensively acquired abroad). As one demonstrator bravely said to camera, the young in North Africa now demand a decent working life, and ‘not just selling falafel on the street-corner’.

However, the EC, European Bank for Reconstruction and Development (EBRD) and other agencies are currently planning to assist these young people mainly with microcredit programs, the aim of which is essentially to support exactly the type of jobs that have just been so ferociously rejected. Microcredit is more likely to inflame the situation in North Africa.

European policy-makers urgently need to understand the drawbacks to microcredit and begin to redirect scarce financial resources into institutions, policy interventions and job creation programs with a far greater chance of making a sustainable impact.

  • Jim G

    I would have to agree with your assesment of the micro credit prgrammes, i am involved in the Credit Union movement in Ireland and the Credit Unions traditionally supply credit to this micro credit market. Currently irelands credit unions have about 40% of their available cash out on loan ( and this is reducing year on year), not because they wont give out loans but because there is no demand in this market. Unlike the 70/80′s in Ireland were there was a demand, in this micro sector that the CU’s filled now that demand has gone away and what i see from these programnmes a false demand will be created.

  • Hugh

    Maren Duvendack et al. reviewed 2,643 articles on microfinance and concluded it was a largely useless tool in poverty reduction. The report was funded by DFID, link below. “If indeed there is no good evidence to support the claim that microfinance has a beneficial effect on the well-being of poor people or empowers women, then, over the last decade or so, it might have been more beneficial to explore alternative interventions that could have better benefitted poor people and/or empowered women.” [page 75].

    David Roodman of the Center for Global Development suggested the overall impact of microfinance was “zero”. Combine such academic research with the evidence of suicides in india, collapses of entire microfinance sectors in various countries, and one does have to wonder if the advocates are deliberately ignoring the glaring evidence that something is wrong with microfinance. The ideological basis of microfinance, its almost cult-like following, the belief that it is the single panacea for global poverty, and its devoted followers, seem to have reached a level where facts, evidence and research are irrelevant. Unsatisfied with the damage caused by some microfinance (note: not all) in developing countries, these same people now wish to replicate this mess in Europe, entirely incapable of learning from previous mistakes. God help us – what a pity these people are in charge. At the very least, is it not somewhat obvious to most concerned that debt is not always and everywhere a blessing? Perhaps we need less debt rather than more?

    http://www.dfid.gov.uk/r4d/PDF/Outputs/SystematicReviews/Microfinance2011Duvendackreport.pdf