Americas Quarterly - Spring 2009

targeting mechanisms are based on indicators of “permanent” poverty, such as housing quality, household access to public services and education and occupation of its members. This is understandable and desirable in stable economic conditions. However, this crisis will likely substantially alter the fortunes of families otherwise not considered vulnerable, as middle-class families lose employment and benefits and as consumer spending contracts. To meet these challenges, the government must develop flexible criteria for eligibility that can better capture sharp,

short-term income declines and protect valuable educational investments by affected families. Moreover, a forceful policy promoting educational investments needs to be coupled with increased school construction, especially in rural, isolated areas.

Naturally, these policies are costly. But the benefits are worth the price. In the short term, they will create badly needed jobs; and in the long term, they will contribute to reducing the educational barriers that have constrained equality of opportunity in Mexico and promote intergenerational mobility.

microfinAnce

by Rachel Greenwald

As financial systems unravel and millions of U.S. borrowers cope with defaulted loans, repayment rates of micro-loans in developing countries have hummed along at their characteristically high levels.

A study released in February by J.P. Morgan and the World Bank’s Consultative Group to Assist the Poor (CGAP)maintains that while microfinance institutions (MFIs) will no doubt be affected by the financial crisis, the sector remains “fundamentally sound.”

However, this does

not mean that microfinance is immune to the effects of the global credit crunch. The secondary effects of the crisis can already be seen affecting the sector’s prospects for growth. Despite high rates of growth in recent years, most now expect a slowdown. From 2004 to 2008, banks in the ACCION network of local microcredit lenders averaged 39 percent return on equity. So far, an increase in borrowing costs of MFIs has not resulted in widespread disruptions in their operations. But those costs will eventually be passed on to borrowers through higher interest rates. Further, decreased remittances, combined with rising inflation, will likely increase default rates.

The vulnerability of individual MFIs to the

credit crisis will vary. Regulated microfinance banks that capture savings and typically finance much of their lending through those savings appear better poised to withstand global market turmoil than non-deposit-taking microfinance institu-

VulnerAbility of indiViduAl mfis to the credit crisis will VAry.

tions, the so-called “financial NGOs” that rely on philanthropy and other loans.

As liquidity dries up, development banks and foreign governments have stepped in to help large multilateral banks maintain their lending. In February, the World Bank and the

German government pledged $500 million to microfinance banks, offering these institutions a chance at public money as private capital becomes scarce. The Inter-American Development Bank’s Multilateral Investment Fund announced in December that it would provide $20 million in financing to an Emergency Liquidity Fund to help microfinance institutions in Latin America and the Caribbean.

Others, though, like the Grameen Bank, see opportunities for microfinance amid the current economic gloom. The Bangladesh-based bank recently began operations in New York and more recently in North Carolina with plans to expand to New Jersey, Nebraska and Louisiana.