Critically discuss the following statement: ‘While Poverty Reduction Strategies mitigate poverty, they
do not address the structural processes that lead to poverty’
1. Introduction
In spite of the centrality of poverty in the International Development agenda, the concept of poverty
remains poorly defined (Laderchi et al 2003). A number of different approaches to poverty have
been developed, each emphasising different characteristics, explanations and policy
recommendations. Merging the approaches outlined by Laderchi et al (2003) and Hickey and du Toit
(2007), this essay considers two distinct and contrasting approaches to poverty: the monetary
approach and the adverse incorporation and social exclusion approach (AISE). Focusing on
microcredit, this essay argues that Poverty Reduction Strategies are underpinned by a monetary
approach to poverty which treats poverty as residual rather than relational (Mosse 2010). As a result,
I argue, poverty reduction strategies fail to address the structural processes that lead to poverty and
at best mitigate poverty, but at worst perpetuate it.
I make this argument by exploring a number of binaries which (albeit rather crudely) draw out the
different position taken by the monetary and AISE approaches to poverty. Though binaries are often
‘clumsy’ and overly simplistic they nonetheless present a coherent method by which to compare
monetarist and AISE approaches to poverty. As will be highlighted in particular in the final section on
formal versus informal, these binaries are not disconnected entities and the boundaries drawn
between them are often arbitrary. The dichotomies utilised to structure the essay are thus a
methodological tool for delineating different approaches to poverty on various issues relating to
microcredit rather than ‘real-world’ representations. This comparison of the two different
approaches to poverty, in turn, facilitates an exploration of the claim made by Green and Hulme
(2005), Harriss-White (2006) and Laderchi et al. (2003) that Poverty Reduction Strategies such as
microcredit that are grounded in a monetarist approach to poverty may at best mitigate poverty but
do not address the structural processes that lead to poverty and may, in fact, act to reproduce
poverty and inequality.
The first dichotomy, that of a relational versus residual view of poverty, is used to introduce the two
contrasting approaches to poverty which this essay draws on and to situate microcredit within the
monetary approach (section two). The second dichotomy, discussed in section three, is that of
entrepreneurship versus employment. This binary is used to compare each approach’s treatment of
the structural processes that lead to poverty. I argue through an AISE approach that by using
entrepreneurship as a ‘quick-fix’ solution to the problem of unemployment microcredit schemes fail
to address the structural processes that lead to poverty. Section four then assesses the implications
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of this failure for the potential of microcredit to mitigate poverty, arguing through the dichotomy of
structure versus agency that microcredit places responsibility on individuals rather than politics for
their poverty. In doing so, microcredit and the monetarist approach more broadly protect vested
interests and reproduce inequality. Section six concludes by arguing that microcredit constitutes an
inadequate strategy through which to reduce poverty and, following Johnson (2013), argues that
long-term socio-political transformation is necessary in order to achieve widespread, lasting poverty
reduction.
2. Residual/relational
In the Oxford Development Journal, Laderchi et al. (2003) outline four approaches to poverty; the
monetary, capability, social exclusion and participatory approaches. This essay focuses on the
monetary and social exclusion approach but, following Hickey and du Toit (2007), expands the
framework presented by Laderchi et al. by adding to the social exclusion approach the concept of
adverse incorporation, forming the adverse incorporation and social exclusion approach (AISE).
Though sometimes held in critical dialogue, the overlap between the social exclusion and adverse
incorporation literature, highlighted by Hickey and du Toit, constitutes a justification for the
incorporation of the two bodies of literature into a single approach.
Following Mosse (2010), a distinction can be made in the way each approach understands poverty.
The monetary approach understands poverty as residual, arguing that the poor are poor because
they are excluded from the market. Poverty is understood as a deprivation that can be reduced to
measurable units of consumption or income (Harriss 2007) and overcome by increasing wellbeing
through enhanced income. The monetarist approach therefore assumes that income and/or
consumption constitute a proxy for other aspects of wellbeing, such as health, education and
political freedom (Stewart 2007). Based on this assumption, microcredit constitutes a solution to
poverty.
Microcredit is the provision of loans to poor people lacking access to formal financial services. In
their classical form, microcredit schemes focus solely in the provision of credit but ‘credit plus’
schemes which offer additional services such as education have emerged (Tankha 2002). This essay
is concerned only with the former. Bateman (2012: 587) explains that microcredit is ‘the highest
profile and most generously financed poverty reduction and ‘bottom-up’ development policy of all’,
having gained support from governments, civil society organisations and international financial
institutions across the world. Proponents of microcredit claim that access to such loans gives poor
people the start-up capital necessary to unleash their entrepreneurial potential and thus lift
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themselves out of poverty (Bateman 2012). This logic is firmly rooted in orthodox economics which
says that an appropriate set of relative prices, increased access to inputs and promotion of non-farm
employment are the key to poverty reduction, particularly in rural areas (Sender 2003). Microcredit
is compatible with, and indeed shaped by, such neoclassical principles in that it acts within the
former (i.e. includes the poor into the free market) and supports the latter two (i.e. provides credit
for inputs which in turn facilitates the expansion of non-farm enterprises).
Microcredit and the monetary approach more broadly is thus based on a compelling, concise logic
which is attractive to donors seeking a ‘magic bullet’ solution to poverty (Oya 2012). Its compatibility
with neoliberal doctrines means it can be rolled-out in a free market capitalist system dominated by
dogmatic supporters of free market principles, notably the World Bank, International Monetary
Fund and US Treasury. Not only is microcredit compatible with mainstream thinking, its positive
effects on poverty reduction have been presented through both statistical and anecdotal evidence.
In a study of 223 microcredit schemes incorporating 560 poor women in India, Tankha (2002) for
example found that average net income per household increased from Rs20,177 to RS26,889,
translating into a reduction in poverty of over 47%, while Yunus (2004) presents anecdotal case
studies of women using microcredit to set up successful microenterprises which have enabled these
women to pull their families out of poverty and even provide jobs for other poor women (in
Roodman 2012). Proponents argue that this body of evidence validates microcredit’s treatment of
poverty as residual, showing that to mitigate poverty simply requires that the poor are incorporated
into the market. Indeed, based on this logic, microcredit not only mitigates poverty but addresses
the structural processes (namely exclusion from financial markets) that lead to poverty.
The AISE approach to poverty presents a contrasting approach to and understanding of poverty.
Unlike the monetary approach, the AISE approach sees poverty as multi-dimensional, complex and
inextricably embedded in social, political and historic processes. AISE is therefore committed to
addressing the causes of poverty, rather than just its characteristics (Hickey and du Toit 2007). As a
result of this commitment, the AISE approach to poverty constitutes a critical lens through which to
assess microcredit and other ‘quick-fix’ solutions to poverty. Of particular importance to this essay,
the AISE approach to poverty reveals the monetarist reading of the structural causes of poverty to
be shallow and partial. By treating poverty as relational rather than residual (Mosse 2010), the AISE
approach shows that poverty is not merely a result of the poor being left out of the market, but a
result of much deeper power relations which are firmly embedded in the capitalist market system
(Harriss 2007; Harriss-White 2010). The critique of microcredit from a AISE perspective drawn out
through the next dichotomy, entrepreneurship versus employment, highlights the inadequacy of
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microcredit’s handling of the socially and politically embedded nature of a key structural process
underlying poverty: unequal access to employment.
3. Entrepreneurship/employment
Proponents of microcredit argue that making loans accessible to the poor leads to poverty reduction
by enabling the poor to set up profitable microenterprises using their entrepreneurial skills and thus
to generate an income (Bateman 2012). By targeting income (or lack thereof) microcredit comes
closer than other Poverty Reduction Strategies, notably the Millennium Development Goals, in
addressing a key cause of poverty; lack of income (Amsden 2012). Furthermore, by addressing classbased inequalities to credit access proponents claim that microcredit targets social and political
inequalities that underlie unequal market integration, suggesting that microcredit does in fact
address the underlying structural processes that lead to poverty.
While it is widely accepted that income-generating opportunities are of central importance to
poverty-reduction (Amsden 2012) the depth to which unemployment is analysed as a structural
cause of poverty varies between those who treat poverty as residual and those who treat poverty as
relational. While the monetarist approach treats unemployment as something to be remedied
through credit access, those who take a social exclusion approach to poverty question why the poor
are unemployed in the first place. A compelling explanation to this question is concerned with the
social institutions that regulate the economy and employment more specifically. Johnson (2013: 538)
explains that ‘informal institutions affect the market’, especially where formal regulation is weak
(see also Harriss-White 2010). Job seekers do not form an orderly ‘queue’ in which they are assessed
solely on their ‘human capital’, but are ‘awarded’ employment on the basis of their social networks
or social capital (Tilley 2006). Social category therefore emerges as a stronger determinant of
economic mobility than ‘individual pluck or luck’ (Tilley 2006: 7).
A number of studies provide empirical evidence of the role of social institutions in determining
access to markets. Argawal (1994) for example shoes how gender determines access to land in
patriarchal Indian societies, with women frequently denied inheritance rights to land on the basis of
their gender. Exclusion from the right to land means women are excluded from agricultural markets,
and even from subsistence farming. Women therefore experience substantial barriers to
employment not because they are individually lacking in some necessary quality (for example
education or credit) but because the market excludes certain social groups. In other words, a key
structural process that leads to poverty is social exclusion from markets, which in turn is a result of
social institutions and power relations (Johnson 2013).
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This contribution by the social exclusion literature to our understanding of poverty brings into
question the potential of microcredit as a strategy to reduce poverty. By not engaging on a deeper
level with the issue of unemployment, microcredit and the monetary approach more broadly are at
best capable of putting a plaster over the wound of unemployment, and at worst deepens the
wound. If social institutions determine access to markets, the linear input-output model drawn on by
the monetarist approach to poverty and, by extension, microcredit, is unveiled as lacking. Giving
poor people credit to start their own enterprises does not overcome the more deeply embedded
socio-structural processes that cause their exclusion from the market in the first place. In the
example presented by Argawal (1994), giving women access to credit will not overcome the fact that
women have limited opportunities to make economic investments (Johnson 2013). Thus, while
credit may at best bring short-term relief in the form of ‘consumption smoothing’ it will not
challenge the structural processes that lead to poverty (Taylor 2012).
A consideration of historical experiences demonstrates the inadequacy of microcredit’s narrow focus
on entrepreneurship as a solution to poverty. Sen and Ghosh (2003, in Sender 2003), for example,
argue that historical analyses show that poverty reduction is achieved through a reduction in selfemployment rather than an increase. In virtually all industrialised countries, from the UK to China,
poverty reduction has come about through increased government expenditure, particularly in rural
areas, which have increased wage employment opportunities (see also Bateman 2012). Such historic
analyses are backed up by more contemporary studies which show that grassroots (as opposed to
government-led) poverty-reduction schemes had little, if any, effect on poverty in sub-Saharan
Africa between 1981 and 2005 (Amsden 2012), while purposive household surveys (those directed at
poor households) find that self-employment is not a feasible option for poor women as its
contribution to consumption is negligible (Sender 2003). Thus, while microcredit may identify
unemployment as a structural process associated with poverty the solution it proposes (i.e.
entrepreneurship) does not adequately address the structural causes of unequal access to
employment opportunities.
4. Structure versus agency
The failure of microcredit to address the structural processes underlying poverty constitutes a major
lacunae in the legitimising logic of microfinance. The persistence of microfinance’s validation in the
face of such a seemingly incomprehensible deficiency can be explained through the self-validating
discourse utilised by microfinance proponents. Microfinance’s focus on agency over structure, seen
through its promotion of entrepreneurship over state-led employment, not only explains the
mechanism by which microfinance supposedly reduces poverty, but also constitutes a defence of its
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logic (cf Scoones 2009). By neglecting to address the social constraints to market access faced by the
poor, ‘failure’ of microcredit schemes can be attributed to individual participants, rather than to the
failure of microcredit to address the structural processes that lead to poverty. Morduch (2002), in a
report for CIDA, for example, explains the failure of some loans to increase income and mitigate
poverty in terms of participants’ lack of entrepreneurial ability, rather than due to structural barriers
to entering the market. By ignoring these barriers in the discourse it mobilises, microfinance is able
to create a ‘scapegoat’ (the poor themselves) for poverty, protecting vested interests of those in a
position of privilege in the capitalist system, who also (unsurprisingly) fund many microcredit
programmes (c.f. Harriss 2007).
Mosse (2010) puts forward a compelling argument for the necessity of considering ‘agenda-setting
power’ and such a consideration indeed raises important questions for microcredit. By treating
poverty as residual; as an aberration rather than an inevitable outcome of capitalism, the monetary
approach (and thus microcredit) ‘depoliticises’ poverty (Harriss 2007). The structural causes of
poverty are overlooked in favour of ‘quick-fix’ technical ‘solutions’ which present a ‘win-win’
scenario in which the interests and position of the elite are protected and in which the poor are
unproblematically incorporated into a ‘mutually beneficial’ capitalist system. Approaching poverty in
this way allows microfinance to simultaneously succeed and fail; it succeeds in gaining widespread
support amongst the international donor community and amongst many national elites but fails to
address the structural processes of poverty due to its inherent conservatism.
While the monetary approach to poverty goes along with the depoliticisation of poverty, the AISE
approach simultaneously uncovers the inability of apolitical Poverty Reduction Strategies to address
the structural processes of poverty and points to their role in the perpetuation of poverty through
the protection of the vested interests of the elite. Treating poverty as relational uncovers the
contingency of the success of some on the failure of others (Mosse 2010) which leads to the
realisation that poverty cannot be mitigated without a change in power relations. By failing to
engage with unequal power relations, microcredit does not address the structural processes that
lead to poverty and thus at best offers short-term relief from poverty, and at worst perpetuates and
entrenches poverty by acting within and supporting the structures that lead to its formation.
5. Conclusion
This essay has drawn on the binaries of residual versus relational, entrepreneurship versus
employment and agency versus structure to draw out two different approaches to poverty (the
monetary and AISE) and the implications of these approaches for assessments of microcredit.
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Through the residual versus relational dichotomy I introduced the idea that microcredit focuses on
the symptoms rather than the causes of poverty. The discussion of entrepreneurship versus
employment considered one such cause, namely the role of social institutions in determining access
to the market and to employment opportunities and argued that microcredit fails to engage with
these institutional barriers. The third dichotomy, agency versus structure, considered the political
motivations embedded in microcredit that potentially explains such an oversight.
Following Green and Hulme (2005), Harriss-White (2006) and Laderchi et al. (2003), this essay has
argued that microcredit, a prominent Poverty Reduction Strategy, fails to address the structural
causes of poverty and yet continues to be celebrated as a ‘magic bullet’ for poverty reduction (Oya
2012). By protecting vested political and economic interests, microcredit has gained widespread
support but ultimately lacks the theoretical grounding, practical potential and political will to reduce
poverty. In order to tackle poverty in any meaningful sense the structural processes that produce
and reproduce poverty must be directly addressed. This requires an engagement with and
contestation of existing power hierarchies and the political systems in which such power hierarchies
are manifested (c.f. Hickey and du Toit 2007).
As a 2007 Chronic Poverty Research Paper acknowledges, poverty is multidimensional, embroiled in
the interlocking domains of economics, society and politics. To address poverty in a meaningful way
therefore necessitates a simultaneous engagement with all of these domains (Moore and
Braunholtz-Speight 2007). By focusing narrowly on the economic domain, microcredit fails to
acknowledge the complexity of poverty and fails to address the interlocking structural causes that
lead to its formation. To address these interlocking domains requires a Poverty Reduction Strategy
that is not based on sterile neoclassical economics but which engages with the political and social
relations that shape the economy. Such an engagement, Johnson (2013) argues, must be driven
‘from below’ by social movements and will not be achieved through ‘quick-fix’ technocratic schemes
such as microcredit. Following Cowen and Shenton (1995), poverty reduction will only be achieved
through a long-term process of socio-political change (so-called ‘immanent’ development), rather
than through short-term interventions (‘imminent’ development), particularly where such
interventions act to reinforce systems of inequality as in the case of microcredit.
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