Microfinance, Debt and Over-Indebtedness

Juggling with Money

Isabelle Guérin, Solène Morvant-Roux, Magdalena Villarreal, Isabelle Guérin, Solène Morvant-Roux, Magdalena Villarreal

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780367110840
• eBook ISBN: 9781135047580
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Although microcredit programmes have long been considered efficient development tools, many forms of debt-induced distress have emerged in their wake. This has brought to light the problem of over-indebtedness, a topic which has been previously underexplored in the literature.

This new book, from a group of leading scholars, explores the manifestations, scale, and economic and social implications of household over-indebtedness in areas conventionally considered as financially excluded. The book approaches debt not only as a financial transaction, but also as a form of social bond, and offers a socioeconomic analysis of over-indebtedness.

The volume puts forward a broad definition of over-indebtedness, highlighting its situational and semantic complexity and diversity. It provides a close analysis of local conceptions of debt and over-indebtedness, highlighting frameworks of calculation and the constant renegotiation of their boundaries. On top of this, it looks far beyond microcredit to examine all the financial practices that individuals juggle. The volume argues that over-indebtedness has more to do with social inequalities than financial illiteracy, and should therefore be understood in the light of global trends of financialization. It also reveals the ambiguity of "financial inclusion" policies, and in many respects questions the actions of new credit providers.

This book will be valuable reading for students, researchers and policy makers interested in microfinance and development issues.

1 Household over-indebtedness in northern and southern countries

A macro-perspective

Jean-Michel Servet and Hadrien Saiag

Introduction

Neo-liberal policies have shaped modes of production, trade and financing for the last thirty years and the crisis of 2007–2008 revealed the untenable nature of household indebtedness in the United States. Apologists of neo-liberalism are convinced that such policies enabled two decades of prosperity, following the 1973–1974 crisis. The approach has become hegemonic, explicitly opposing interventionist Neo-Keynesian policies under which public and private debt drive demand for investment and consumer goods, through deficit spending and money creation. This makes it possible to anticipate demand and make it ‘effective’, because it is solvent. By contrast, neo-liberals believe deficits should be banned; for them, a balanced budget is a precondition of equitable distribution. To the extent that deficits are considered the culprits of rising prices, they favour debtors at the expense of creditors. Although neo-liberal morality (if we can call it that) opposes this type of imbalance, growing levels of household indebtedness reveal that such opposition is naive. China and India notwithstanding,¹ overall growth rates were on average two times higher during the so-called ‘Keynesian’ period (the post-Second World War boom from the 1950s to early 1970s) than they were during the neo-liberal years that followed² and precarious working conditions have greatly increased. Since the 1980s, the ‘fruits of economic growth’ have been distributed in an increasingly unequal manner. While this period has been the ‘golden age’ for financial markets,³ it could also be called the ‘calamitous years’. Unemployment rates, in particular, were much higher from 1980–2000 than 1950–1960.

The purpose of this chapter is to show that the rise of household debt is not unique to ‘developed’ countries. In the North, indebtedness is a well-documented fact; it has been quantified and its contribution to macroeconomic relationships has been studied. However, little data is available from the South. This could lead one to think that rising household debt is not an issue. Yet, the contributions in this volume indicate the opposite. In fact, the South is also affected by over-indebtedness. There is a growing mismatch between monetary income and cash needs, the source of debt.

Our argument draws on two kinds of sources. Concerning the North, we rely primarily on the work of the French School of Regulation. In the South, rising household debt has not, to our knowledge, been the object of thorough macroeconomic analysis. Nor is it measured by statistics, due to the extent of informal financial practices. In this chapter, we aim to shed light on the gap created by the slow growth of most households’ cash incomes and their growing financial needs. Therefore, we rely on official reports (mainly from the International Labour Organization, concerning remuneration and employment trends) and statistics (from World Bank, concerning the growth of cash needs).

This chapter is organized into three parts. The first part addresses the growing role of household indebtedness in so-called ‘developed’ countries. Around the world, debt has bolstered consumer spending, which has been affected by slow income growth and a rise in social inequality. The hegemonic role of the United States at the heart of global finance has allowed it to drain considerable resources. As a result, household debt has become linked to inflation in real estate and capital markets, leading to an ephemeral accumulation regime ‘driven by finance’ (Boyer 2000). The second part examines the rise of indebtedness in the South. To grasp its magnitude, we revisit the process of financialization. It is based on a growing monetization of social relationships. As in the North, the slowdown of growth in workers’ earnings has been accompanied by a sharp rise in social inequality. Incomes are evolving in a way that is incompatible with cash needs, which are growing as home consumption decreases due to urbanization; the widespread desire to imitate the consumption patterns of others due to the potential equality between individuals (see Dumont 1976); and the rise of informality and irregular income flows. Household over-indebtedness stems from this contradiction. Finally, the third part discusses a key element of over-indebtedness: inflation. If social relations would allow it, modest inflation would be a relatively peaceful way to solve the problem of growing private and public debt in a way that favours lenders.

Household debt in the North: the heart of an ephemeral accumulation regime

To understand the rise of household indebtedness in the North, we must first reconstruct debt’s role in macroeconomic dynamics. The latter have been studied in depth by the Regulation School. Between 1950–1970, according to this school of mainly French economists, Northern countries experienced different forms of a single accumulation regime called ‘Fordism’.⁴ It was characterized by a conflictual, albeit stable compromise between capital and labour concerning the distribution of productivity gains (the Fordist wage–labour nexus) resulting from the ‘rationalization’ of production. As economies were rarely open to international trade at the time, wage gains engendered an increase in effective demand. Moreover, government intervention helped support economic activity (through budget deficits and advances to the Treasury) and a relatively equitable distribution of wealth. Added to this was constant inflation, whose negative real interest rates were advantageous to borrowers.

The crisis that hit in the 1970s fundamentally threatened the institutions underpinning these macroeconomic relationships: the rise of real wages collided with an opening of economies (Boyer 2004). The institutional forms⁵ that provided the scaffolding of the accumulation regime were overturned. Thus, since the 1980s, governments have scaled back direct intervention in the economy: they now create institutions designed to ‘deregulate’ modes of production, trade and financing. They have provided the impetus to significantly develop financial markets (particularly those dealing with public debt) and dismantle the Fordist wage-labour nexus. In the North, the result has been the development of new forms of work on the margins of wage labour⁶ (short-term, part-time, student jobs, sub-contracting, etc.). These new forms of employment have driven down the salaries of unskilled workers and increased insecurity (due to poor benefits packages). Consequently, social inequality has skyrocketed (Feller and Stone 2009; Picketty and Saez 2003).⁷

Despite the escalation of social inequality caused by these changes, this new institutional arrangement has sometimes given way to macroeconomic coherence, as in the case of the United States and, to a lesser extent, the United Kingdom. This appears paradoxical, since the dismantling of the Fordist wage system and the increasingly inequitable distribution of wealth has depressed effective demand. As a result, households are heavily indebted, through various forms of consumer credit (particularly credit cards). But the novelty of this finance-led accumulation regime⁸ does not lie herein. Rather, it is the way it disconnects consumer spending and income generation. Indeed, the advent of loan securitization (especially mortgages) has fostered a new form of household debt: the main limitation is no longer anticipated household income, but the valuation of the securities that serve as collateral. In other words, the only limit to household indebtedness is the valuation of real estate and financial securities. As the values and volume of these securities increase, so does debt. As a result, massive household indebtedness now underpins the American economy, household debt at one point reaching 96 per cent of GDP (gross domestic product) in 2009. In 1954, total domestic debt in the United States was only US$500 billion. In the first half of 2009 alone it exceeded US$50,000 billion.⁹

The United States’ unique position in the global financial system has made this situation possible. At a global level, this headlong rush was facilitated by trade surpluses from countries like China and oil exporting countries with small populations. Their investments appeared safe, because they were made in one of the world’s most developed countries, and because the dollar became the financial world’s reserve currency following the SecondWorld War. Thus, a considerable amount of money flowed into the United States.

This accumulation regime is based on a reversal of roles whereby the productive sector must now answer to the financial sector. According to Robert Boyer (2000), the break with Fordism is obvious. In Fordism, the wage labour relationship prevailed, insofar as it allowed the synchronization of mass production and consumption by institutionalizing a distribution of productivity gains from the ‘productive’ sphere. In the finance-led accumulation regime, there is a reversal of the hierarchical relationship between institutional forms – finance and the wage relation – that is advantageous to the financial sector, which now controls the economy. Indeed, stock prices simultaneously determine investments decisions, household debt and consumption choices, fiscal policy (the tax burden has been shifted to employees to enable the development of capital markets) and finally, monetary policy (aimed at financial stability). Finance no longer relies on production and trade; it has reversed the relationship at a scale never before seen. While financiers claim to serve society and create prosperity, finance has become increasingly predatory (Servet 2012), destroying wealth through the constant processes of valuation/devaluation that ensure its development and result in precarious living conditions for the immense majority of the population.

This accumulation regime has really only flourished in the United States and the United Kingdom. The supposed virtuous circle of debt, financial markets and household consumption has not been observed elsewhere. In other words, the modes of regulation in Northern countries are very diverse. Michel Aglietta (1998)¹⁰ has argued that the equity-based (‘patrimonial’) growth regime would become a permanent fixture in continental Europe. The argument is consistent with the increasingly widespread use of household debt to offset loss of income. But we cannot conclude from this alone that worldwide economic growth is characterized by a finance-led accumulation regime. Indeed, according to the typology created by one regulationist theorist (Boyer 2004), an accumulation regime must be capable of reproducing institutional forms consistently over a relatively long period. Currently, debt allows households to significantly boost their consumption by increasing the value of their assets in order to compensate the loss of wage income. This implies that household wealth is increasingly based on asset-backed securities. Robert Boyer (2000) has showed that this only holds true in the United States and possibly the United Kingdom.¹¹ Elsewhere, the model has not taken hold. Thus, although the financial sector now has considerable influence over economic developments in continental Europe,¹² we have not yet seen an accumulation regime that is capable of generating steady growth since Fordism.

Despite the different trajectories of ‘developed’ countries, debt expansion has been the common vector, draining resources to the benefit of the financial sector. Hence, tremendous financial growth (such as the sextupling of stock market capitalization between 1990–2007 and the boom in securitized financial products) frequently goes hand in hand with outflows from the ‘productive’ sphere (just look at the financial sector’s profits and extraordinary salaries).¹³ Here too, the United States stands apart:

The enormous financial growth that has accompanied market deregulation and globalization suggests that the process could not go on forever. In 1980, the profits generated by the American financial sector represented 10 per cent of total private sector profits; in 2007, it was 40 per cent. The same year, the financial sector employed only 5 per cent of the salaried workforce of the private sector, and contributed only 15 per cent of value added. The financial sector has thus sucked out the value created by the economy; the value has disappeared in exorbitant salaries for traders, extravagant commissions for capital restructuring operations, securitization and asset management. Market capitalization of the financial sector collapsed in 2008 because it had inflated without restraint, increasing six fold; the financial sector’s share grew from 6 per cent in 1980 to 19 per cent in 2007.

(Aglietta and Rigot 2009: 19)

In other words, the United States and perhaps the United Kingdom notwithstanding, growing household debt has not been able to stave off the decline in effective demand. There are several reasons for this. The dismantling of the Fordist wage regime may be justifiable from a microeconomic perspective, but it reveals pressure to drive down global demand on a macroeconomic scale, all things being equal. The surge in income inequalities has stripped wealth of its reproductive capacity, because households’ marginal propensity to consume is decreasing in relation to the level of income: wealthy people’s financial investments do not create effective demand because they do not stimulate production. In addition, increased international competition for domestically produced goods has reduced fiscal pressure on the private sector in the name of competitiveness. Customs duties collected by the governments have decreased considerably. And since public expenditures have not been cut, these tax revenues have been recovered through taxes on salaries, and very occasionally and to a much lesser extent, on real estate, assets, and luxury goods. These direct and indirect taxes have pushed down incomes of the majority a...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of illustrations
• Notes on contributors
• Acknowledgments
• Introduction
• 1 Household over-indebtedness in northern and southern countries: a macro-perspective
• 2 Indebted Mexicans in the Californian mortgage crisis
• 3 Debt, over-indebtedness and wellbeing: an exploration
• 4 Why do the poor pay more for their credit? A French case study
• 5 Debt, credit and contractual synchrony in a South Indian market town
• 6 The social meaning of over-indebtedness and creditworthiness in the context of poor rural South Indian households (Tamil Nadu)
• 7 Protection and over-indebtedness in rural South India: the case of labour migrants of Andhra Pradesh
• 8 International migration and over-indebtedness in rural Mexico
• 9 Multiplying debt and dependence: gender strategies and the social risks of financial inclusion in Western Mexico
• 10 Does juggling mean struggling? Insights into the financial practices of rural households in Madagascar
• 11 The social costs of microfinance and over-indebtedness for women
• 12 The commercialization of microcredits and local consumerism: examples of over-indebtedness from indigenous Mexico
• 13 Mortgaging used sari-skirts, spearheading resistance: narratives from the microfinance repayment stand-off in a South Indian town, 2008–2010
• 14 Conclusion
• Index