The microfinance industry is expanding at breakneck pace, with more banks and private equity firms now entering the fray. Yet there is growing unease about the naive assumptions, and evangelical predictions, of its advocates.

In 2009, 128 million people received microfinance loans, according the Microfinance Summit Campaign. Such services are increasingly being used in untested settings, from post-disaster reconstruction in Haiti and entrepreneurship programmes in Iraq to consumption smoothing during seasonal famines in Bangladesh.

“Microfinance has a certain populist appeal,” says Ha-Joon Chang, professor of economics at Cambridge University.

“(But) simply throwing money at people and hoping for the best, without extending complementary inputs to raise productivity, such as warehousing, fertilizer, export marketing, market research support and so on, means you reproduce poverty rather than eliminating it,” he told IPS in an interview.

One issue is market saturation: “If you lend to one person to buy a phone and rent it out, she might make some money but very quickly many others enter the market, unleashing intense competition. There are a limited range of things that poor people can do in many of these contexts, and limited scope for productivity gains.

“How much more efficient can you get at frying food or raising chickens?” Chang asks.

While microcredit modestly raises rates of business creation, it is not clear that such enterprises grow. Professor Abhijit Banerjee from the Massachusetts Institute of Technology (MIT) has conducted a series of randomised controlled trials of microfinance and claims to have found scant evidence of enterprise expansion.

“We see lots of business creation, but little business growth. Of course, there is no solid proof that such growth could not happen, but none of the evidence is pointing in that direction at the moment,” Banerjee points out.

One consequence of business creation without growth, warns Professor Aneel Karnani at the University of Michigan, could be the formation of “atomised” economies with many small-scale activities, and a “missing middle” of small to medium-sized enterprises (SMEs).

Karnani told IPS: “This is a zero sum game, in the sense that resources are limited. Microcredit is attracting a lot of money, human and political capital and energy and enthusiasm from NGOs (nongovernmental organisations) and government officials that could have been channelled into SMEs, the real engine of job creation.”

Karnani also believes the poor overwhelmingly desire access to formal jobs, rather than the opportunity to be entrepreneurs. “Microcredit is based on a fallacy that people not only want to be entrepreneurs but have the will, ability and preference to do so.

“Most people are not like that. In the U.S. and UK, 90 percent of the workforce chooses to work for a salary rather than be an entrepreneur. If 90 percent of people in rich countries choose not to be entrepreneurs, with all that education and excellent public infrastructure, why do we think people in poor countries want to?”

Reports of fraudulent microfinance institutions and unwise investments, for instance in pyramid schemes such as happened in Tanzania in 2010, have led to calls for complementary training in financial literacy, but Dean Karlan, professor of economics at Yale University and co-author of a recent book “More Than Good Intentions”, has reservations.

“I am concerned about the scalability of financial literacy programmes. Perhaps we should instead accept the state of people’s knowledge and work with that. The government can play a role on the consumer protection side, such as regulating for clear disclosure policies. We need tests, not assumptions and dogmatic rhetoric, to know the way forward.”

Karlan, like Banerjee, is interested in building the evidence base to improve the evaluation of microfinance and describes ‘‘before and after” studies, used by both advocates and critics, as “analytically silly”. The criteria against which successes are measured, such as whether a post-loan client no longer ‘‘sells assets at fire-sale prices during shocks”, are impossible to prove.

Randomised controlled trials may be one way to rigorously establish impact. Yet, however impact is evaluated, some have fundamental concerns regarding the consequences of inevitable defaults, or the personal distress resulting from the fears of default, in large part due to the public shame associated with failure.

Kasia Paprocki of the Goldin Institute told IPS: “The claim that microcredit is collateral-free is false. Loan officers will document what you have – pots, pans, productive assets, a rickshaw and so on – and retrieve it if you do not pay. People have literally had their roofs removed for defaulting.”

Paprocki cites evidence of physical and sexual abuse from loan officers, and claims that in Bangladesh some people sell government food aid during seasonal famines to pay off loans. She also claims that many women who struggle to repay become isolated in the community and cannot call upon social networks.

She expresses concern at donor enthusiasm. Some, she claims, are telling NGOs “they will not receive funds for their programmes unless they adopt microfinance”.

Most critics acknowledge that micro-finance is here to stay. Some, such as Karnani, would like to see the back of it while more moderate voices, such as Chang, believe it can play a role in development, but in the context of broader development interventions.

Others, such as the so-called ‘randomistas’ at the likes of Yale and MIT, simply wish to improve the state of knowledge about impact before the industry expands on heightened expectations. One thing is clear: the honeymoon is over.

The 3.75 billion dollar World Bank loan for a new coal-fired power station in South Africa is essential for economic growth in neighbouring low income countries, according to Dr Mohamed Abdelrahman, energy advisor for the New Partnership for Africa’s Development (NEPAD), a programme of the African Union.

The controversial loan, awarded earlier this month to South Africa’s state-owned power utility Eskom, will part-fund the Medupi coal plant. Located in the country’s northern Limpopo province, the plant will add 10 percent to the country’s dwindling power supplies and emit 25 million tons of CO2 per year.

The loan has been opposed by several charities, environmental groups and non-governmental organisations (NGOs) on account of its impact on the climate and on local residents in Limpopo.

Earthlife Africa and groundWork, two South African NGOs, predict Limpopo residents will suffer “considerable” public health problems.

But, in an interview with IPS, Abdelrahman argued that the World Bank was right to fund Medupi because of the potential impact of energy shortages in surrounding low income countries.

“Eskom is pivotal in southern Africa because of the considerable electricity trade between South Africa and the neighbouring countries. Power shortages mean blackouts throughout the region, which cause disturbance of industry, lost profits and harm to public services.”

Eskom generates 95 percent of the electricity used in South Africa and over half that is used in Africa, and is the main producer and buyer in the Southern African Power Pool (SAPP), a 12-nation energy union.

Years of underinvestment have led to growing power shortages affecting all countries in the SAPP, with widespread blackouts in 2008.

“Lesotho and Swaziland, as well as Namibia and Botswana, are very dependent on Eskom, as they have very little energy production of their own,” according to Hans-Arild Bredesen, managing director of Nord Pool Consulting, advisers to the SAPP.

Doctors at Lesotho’s Queen Elizabeth II Hospital postponed surgical operations after the Eskom cuts, because of fears of future shortages. When supplies resumed, it was too low to meet the country’s needs, stated Mzimkhulu Sitheto, advocacy officer of the Transformation Resource Centre, an ecumenical group in Lesotho.

She told IPS: “Demand could only be met during the night hours.”

Two years on, Basotho salesperson Motanyane Makara struggles to keep up with the escalating tariffs: “Money has lost value. Even if I put aside 100 Maloti (13 dollars), it is not enough given the rate at which tariffs have increased. For someone who has five dependents, it is hard to maintain a stable livelihood.”

The mining sector in southern Africa – which provides almost a quarter of the region’s output and 13 percent of employment – was heavily affected by the January 2008 cuts too.

Konkola Copper Mine in Zambia, one of the largest in that country, shut down temporarily and Zambia’s energy company Zesco reduced supplies to Zimbabwe.

Mining companies in uranium-rich Namibia, a country relying on Eskom for 80 percent of its power, were asked to reduce power use. BHP Billiton, the resources company, temporarily closed down operations at its Mozambique smelter.

“Whether you have a small shop or business, or a factory making plastics or glass, blackouts incur physical loss and forfeited profits. Supporting energy supplies will support industry and job creation,” explained Abdelrahman.

But critics of the loan do not believe low income countries in the region will benefit from the Medupi loan.

“Eskom is driving energy policy in a way that favours extractive industries and heavy energy users over providing energy for the poor, which is one of the region’s pressing problems,” declared Lori Pottinger, who works on African energy issues at International Rivers, a California-based advocacy group.

“Providing low-cost electricity to mines and smelters while three-quarters of the regional population has no electricity is an unsustainable and unjust model of development,” she added.

Several mines and smelters have access to cheap energy because South Africa in previous decades had abundant power, which the government offered to companies at a low cost to attract value-added industries.

Some present contracts reflect the historical agreements, and demand from these companies is now “overwhelming” South Africa’s electricity system, said Eliot Whittington, senior adviser of the Climate Justice Initiative at Christian Aid. Christian Aid is an international development charity working to eradicate poverty.

But NordPool Consulting’s Bredesen expressed concern that, if Eskom falls too far behind, tariffs will spiral in surrounding countries.

“South Africa has the best economic resources to pay for electricity as well as being the largest market in the region, so if Eskom cannot keep up with demand it will buy more power from other producing countries in the SAPP region, pushing up prices for their consumers,” he argued.

Regarding renewable energy, while South Africa has considerable potential for wind, solar and marine energy, in the short term the sector can only play a “limited” role, explained Professor Wikus van Niekerk, director of the Centre for Renewable and Sustainable Energy Studies at Stellenbosch University near Cape Town, South Africa.

This is due mainly to regulatory problems in South Africa,

The International Monetary Fund (IMF) has published the first details of a proposed financing framework, dubbed the ‘Green Fund’, intended to mobilise 100 billion dollars a year by 2020 to help developing countries cope with the consequences of climate change and mitigate further emissions.

Outlined in a staff paper by IMF economists Hugh Bredenkamp and Catherine Pattillo, the Green Fund could launch from a capital injection by developed countries, in the form of Special Drawing Rights (SDRs), a currency issued by the IMF to member countries.

The facility would eventually combine resources from investors, raised through ‘green bonds’ in global capital markets, with developed country subsidies. Contributors could scale their equity stakes in proportion to their IMF quota share.

Aid would then be extended in the form of grants or highly concessional loans to developing countries but the IMF would not finance or manage the Fund, according to the authors.

The IMF began working on the concept of a Green Fund following the talks at the United Nations Copenhagen Conference (COP15) in December because, while finance was discussed and various figures pledged, it was not clear where the money was going to come from.

“The risk is that, without a credible framework for delivering financing on the scale necessary, soon enough, and on the right terms, developing countries’ response to climate change will be either insufficient or delayed, thereby endangering sustainable growth and increasing ultimate costs, or financed in ways that are inconsistent with maintaining fiscal and broader macroeconomic stability,” the authors write.

IMF officials told IPS the Fund could enable faster and more reliable disbursement than uncoordinated aid pledges from rich countries, which often fail to materialise.

Thursday’s report is the first time the IMF has directly implicated itself in the issue of climate-related financing efforts. However, the authors stress that the proposal is not a formal announcement by the IMF to create the facility.

Ilana Solomon, policy analyst at ActionAid, told IPS that she welcomed the IMF paper as “an interesting contribution to the debate”, and that she supports the use of SDRs in climate financing and believes this proposal has broken through the barrier of using SDRs for finance.

“A consolidated, centralised Fund, as long as there is transparency, will also facilitate the tracking of commitments,” she said.

But Solomon expressed concerns about “lack of clarity regarding where the Fund would sit, and the implicated role of the World Bank” in terms of funding management.

“ActionAid wants to see an explicit endorsement of the United Nations Framework Convention on Climate Change (UNFCCC) as the medium through which resources should flow,” she told IPS.

Solomon also questioned the 100-billion-dollar per annum benchmark against which the Fund is framed, suggesting 200 billion dollars per year in public financing as a more appropriate figure, and pointed out that climate finance should consist entirely of grants, not loans, because the developed countries are responsible for the majority of emissions.

Peter Chowla, programme manager at the Bretton Woods Project, told IPS he was also pleased that the issue of using SDRs in climate finance was being raised, but that the IMF was stepping beyond its mandate.

“No institution other than the UNFCCC should run climate finance. That is the only legitimate forum where everyone has a say,” he said. He added that before they can play a constructive role in climate financing, IFIs needed to undergo radical reform.

“You cannot take an institution with a lop-sided governance structure and expect it to be trusted,” he said. “To base any new institutional arrangement on the IMF quota formula is backward looking.”

The IMF paper is published just days before the first meeting of the newly formed U.N. High-Level Advisory Group on Climate Change Financing, which takes place on Monday, Mar. 29 in London.

The advisory group is chaired by British Prime Minister Gordon Brown and Ethiopia’s Prime Minister Minister Meles Zenawi, along with other heads of state including Jens Stoltenberg, prime minister of Norway. Trevor Manual, South Africa’s respected minister for national planning, the philanthropist George Soros and Nicholas Stern, the climate change economist, are also members of the group.

The European Commission (EC) is increasing the pressure on the East African Community (EAC) to sign the free trade deal known as an economic partnership agreement with the EU.

Jacques Wunenburger, head of the economic partnership agreement (EPA) Unit at the EC, told IPS: “If no EPA is concluded, then these countries would be accommodated under either the ‘Generalised System of Preferences’ or ‘Everything But Arms’, as there is no other trade instrument available”.

Both options would entail more stringent rules of origin and higher duties on EU imports than an EPA, he said, burdening companies that buy machinery and capital goods from Europe.

The interim EPA, also known as a Framework EPA (FEPA), is the first legally binding step towards a full EPA, a new trade framework that replaces the preferential, non-reciprocal trade system between the EU and the African, Caribbean and Pacific Group of States (ACP) that expired in 2007.

Talks have stalled due to EAC fears concerning reduced policy space, declining tariff revenue, and damage to local industry from EU imports. Compensation aid has also been a source of dispute.

The deal would require Burundi, Kenya, Rwanda, Tanzania and Uganda to liberalise tariffs on 82.6 percent of EU goods imports by 2033, while the EU liberalises all tariffs on EAC goods imports, with transition periods for rice and sugar.

David Hachfeld of Oxfam Germany told IPS that tariff liberalisation could cause enormous revenue losses for the EAC.

But Wunenburger insist that such fears are exaggerated: “Commentators often refer to the costs of EPA, such as fiscal losses due the lowering of customs duties, without considering that tariff dismantling could attract more trade, and increased volumes could partially offset the reduction of duties.”

Reductions in tariff revenue will be gradual.

Hachfeld further argues that EPAs could depress local industry. He told IPS: “EAC countries would never be able to increase industry in competition with the EU, and might not see a rise in exports, except in basic food products.”

Finally, he criticised the controversial Most Favoured Nation (MFN) clause, whereby the EAC would have to offer the EU the same trade terms as they offer other large countries and regions.

“MFN is important to the EU because they see emerging economies such as India and China, or blocs like Mercosur in South America, as competitors,” he said. “But it limits the flexibility of EAC countries to negotiate with different partners and get the best out of each deal.”

Marc Maes, an EPA critic from the coalition of Belgian non-governmental organiaations (NGOs) known as 11.11.11, says another clause, prohibiting increases in export taxes, is of similar concern because it prevents governments from stemming the flow of certain goods out of the country which may be necessary for building up local industry.

The EC wants the clause because access to raw materials is important for EU industry.

Aid compensation to address constraints to trade, like infrastructure, has been another key point of contention.

“Some EAC countries want the EU to pledge fresh money, but the EU has refused, arguing that there is a lot of money already available through the European Development Fund and aid from EU member states,” explains Dr Sanoussi Bilal, head of the economic and trade cooperation programme at the European Centre for Development Policy Management (ECDPM).

The EU is also adamant “that EPA negotiations are not about new aid for trade pledges”, adds Bilal. Brussels has agreed to look at a list of funding requests, but it is not yet clear whether this will entail ‘‘new” money.

So far only one EPA has been finalised, with the Caribbean bloc, Caricom. Talks elsewhere have seen considerable differences of opinion.

“In Africa, only Botswana and Mauritius agree with the broad EU approach”, says Maes. The Economic Community of West African States (ECOWAS) wants to liberalise around 67 percent of their markets in 25 years rather than 80 percent, for instance, because of concerns about food sovereignty and economic development.

Supporters of EPAs point out that the ACP share of EU trade declined under the unilateral preference system, from seven percent in 1975 to 2.9 percent in 2006, and remained concentrated on a small number of products such as oil, diamonds, cocoa and wood.

They also note the need for a predictable, transparent and simplified system with proper dispute resolution mechanisms through the arena of the World Trade Organisation (WTO), rather than a unilateral gesture extended by EU largesse.

Ben Bennett, principal economist at the Natural Resources Institute, notes that while preferential market access has been a powerful tool to generate growth, countries with an underlying comparative advantage, such as Kenya has in horticulture, can prosper under an EPA. The NRI is a multi-disciplinary research centre.

Private sector institutions in East Africa are growing impatient with the delays. “Uncertainty means unpredictable policy, which holds back investment,” said Godwin Muhwezi, council spokesperson for the East African Business Council (EABC).

EC frustration is growing. In February, EU Ambassador to Tanzania Timothy Clarke said in a statement: “The situation, as it stands now, is untenable. The EAC countries, despite not signing the EPA, have been enjoying free access to EU markets in the same way with other ACP countries that took legally binding commitments by signing”.

Ronnie Hall, an independent consultant working with the Global Forest Coalition and Friends of the Earth, is critical of the aggressive approach: “The EU has been quite ruthless in pitting different ACP regions against each other, even negotiating bilaterally with different countries within EPA regions,” she said.

But John Clancy, EC spokesperson on trade, denies that the EC is applying undue pressure. “Last year, the EAC put forward a number of concerns and the EU discussed them in order to find appropriate and feasible solutions. Let’s not forget that we are now in 2010, more than two years after having initialled the FEPA, which has not been signed yet,” he said.

Brussels hopes the interim EPA will be signed this month, to provide a sound legal footing for full EPA talks on heavily contested issues of investment, services and intellectual property rights.