The year 2022 marks an important anniversary in the field of economic development and poverty reduction. It was exactly 50 years ago that the shift from top-down industrial development to direct targeting of the poor began.
The first salvo was launched by the International Labour Organization (ILO), whose April 1972 study of the persistent lack of decently paid employment in Kenya concluded that the “informal economy” was both dynamic and offered more hope for the poor to earn a living than the formal labour market.
A USAID workshop in August that same year also focused on the failure of industrialisation in developing countries to absorb the rapidly expanding labour force into productive employment in cities. It recommended supporting informal family enterprises (as opposed to individual micro-enterprises) in urban areas as well as programs to expand agricultural employment.
In September, then-president of the World Bank Robert McNamara initiated a strategic shift toward programs that generate greater benefits to the poorest groups in the developing countries. When formally announced the following year, the strategy emphasised increasing the productivity of smallholder farmers.
In the world of economic development, these changes were seismic. Until then, smallholder farms and the informal urban enterprises were viewed as stagnant and a subsistence net for the unemployed––activities to escape from, not to encourage. They had largely been ignored, but new research showed that under the right circumstances they could generate income above subsistence. Supporting the informal economy would reduce the absolute poverty and degradation that afflicted 40 per cent of the population of developing countries at that time, as well as stem migration from rural areas to urban slums.
The ILO and USAID papers and McNamara’s speech all mentioned credit as one constraint that prevented smallholder farmers and informal entrepreneurs from realizing their potential. They may not have been aware that in March 1972 USAID had begun to evaluate its approach to rural credit. The final report, published by USAID in July 1973 as the “Spring Review of Small Farmer Credit”, created a sensation. It criticised programs that directed subsidised credit through government-owned banks and called for a more commercial approach.
This meant shifting the focus of rural finance programs toward organisational development of financial service providers, including raising interest rates so that they could be profitable. There was no need to check how poor borrowers used credit; as long as the financial service providers remained in business and clients paid back their loans, it was assumed that the loans were contributing to farm and enterprise development and thus reducing poverty.
Today, with so much development assistance emphasising market-based approaches, it is hard to imagine a time when mobilising the private sector (or financially sustainable “social enterprises”) to address poverty was not just unorthodox, but considered dangerous. The recommendations from the Spring Review were met with fierce resistance. USAID made a strong effort to convince staff, national credit personnel, and political figures of the merits of the new approach through workshops, research projects, a quarterly Newsletter on Rural Financial Market Research and Policy, and by compiling lists of consultants who agreed with the new approach.
In fact, none of the papers and speeches from 1972 elevated the private sector and the market to such a lofty role in reducing poverty. All of them placed greater emphasis on public programs and investments. McNamara’s recommendations included supporting farmer associations with land reform, irrigation programs, extension services, and investment in rural infrastructure and public services.
USAID’s recommendations for rural development included investments in land improvement, communication, transportation, education, and health care as well as promoting farmer organisations. For informal family businesses, USAID recommended creating trade organisations to defend the interests of small producers, cooperative purchasing organisations, and delivering technical assistance, acknowledging that “the implementation of such a policy would be expensive in view of the size of this sector”.
ILO’s recommendations included policy targets for nutritional standards and access to clean water, health services, and basic education. Even the Spring Review warned against exclusively providing credit, noting that productive technology, quality inputs, and market access are needed to make commercial credit profitable.
These public programs were necessary to offset the real problem, which was not that economic development strategies had failed, but that the gains from development were being captured by an elite few at the expense of the rest of the population. USAID noted that “the urban elite is consequently the only subsector capable of accumulating a sizeable personal surplus. It is protected against excessive income sharing by the impermeable social barriers which separate it from lower-ranking employment subsectors. Much of this growing surplus, however, will be channelled into conspicuous consumption such as villas, automobiles, servants, jewellery, travel, private education, and art objects, and into ‘safe’ but profitable investments such as real estate”. It recommended abandoning policies that favoured the production of consumer goods for upper-income groups in favour of policies that protected family businesses from competition from the corporate sector, and taxes on luxury goods.
McNamara noted that “in most countries, the centralised administration of scarce resources––both money and skills––has usually resulted in most of them being allocated to a small group of the rich and powerful” and recommended the reorganisation of government services and institutions toward the poor. ILO went furthest, proposing an economic model of “redistribution from growth” that included cash payments to support the income of informal sector households, with taxes and other policies that “stabilized” incomes at the top to pay for it.
In other words, all of them located the central cause of poverty in local politics, with differentials in power driving unequal market outcomes. Their full recommendations for reducing poverty sought to overcome the monopoly on economic gains from market transactions by the politically powerful in order to redistribute wealth downward.
However, these parts of their recommendations were soon forgotten. Instead, the idea of targeting the poor directly was married to the concept of commercialised credit delivery, and the new era of market-based development began.
Starting with microcredit, multilateral and bilateral development agencies have spent a half-century moving further in this direction. Such programs are based on an implicit assumption that the poor are able to extract a surplus from market transactions.
There is no question that absolute poverty has been significantly reduced since 1972. The question this blog series intends to explore is whether and how much this approach to economic development contributed to that outcome, or if instead the pursuit of “market-driven, private sector-led, pro-poor growth” simply privatises the problem of poverty.
Ron Bevacqua is an Adjunct Research Fellow at the Griffith Asia Institute as well as the Co-Founder and Managing Director of ACCESS Advisory Inc.