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Theory And Evidence Of Microfinance And Poverty Economics Essay

2.0 Introduction It is widely believed that, together with improvement in their geographical surroundings, micro finance is a powerful tool to alleviate poverty and empower women in their development. However these facilities are not restricted to women only. It is also extended to all those who are struggling to combat poverty or to indulge in their own entrepreneurship. Therefore, this chapter will review definitions in the field of microfinance and poverty. To enlighten further the study, empirical evidence are being analysed and discussed more appropriately below.
2.1 What Is Microfinance? image1.png
The idea of microfinance started in Bangladesh around 1976 with Muhammad Yunus and Grameen Bank who has recently awarded the Nobel Peace Prize for his achievement. Microfinance refers to the supply of loans, savings and other basic financial services to poor. With innovative means and development microfinance has been adopted and practiced in most developing countries where it has gained unbelievable success. Moreover, from December 1997 till December 2005 the number of microfinance institutions increased from 618 to 3,133. Supplementary evidences regarding its developments have been attached at Appendix I.
However, different people have different views and opinions in respect of Microfinance. For instance, Otero (1999) classifies Microfinance as the provision of financial services to low income, poor and very poor self-employed people. Whilst Ledgerwood (1999) believes that it is a sustainable poverty solution and it includes savings, credit and other financial services such as insurance and payment services, on the other hand Schreiner and Colombet (2001) described it as an attempt to phase out poverty by improving the access to small deposits and loans for poor households who were being neglected by formal banks and financial institutions, mostly because of their poor credit worthiness.
Generally speaking microfinance is becoming an imminent economic tool to politicians to up bring those people who are vulnerable or beyond the minimal level of income holders. It is a way to extract the arts, qualities and skills that these people possess in front of the society by upgrading their enterprise, image and standard levels. In some countries, during the financial crisis that hit the global economy, governments have emphasised heavily on these instruments to combat a way out of this turmoil. Such facilities, inclusive of small loans with low interest rates, counselling and bumper advertising campaign to promulgate the concept of microfinance were brought to the poorest, especially in rural areas.
Microfinance involves short term savings and lending which are different to that of formal banks. Such facilities bear low interest rates and repayments facilities with the aim to cover the delivery costs only. The costs of capital are recouped upon maturity and whole administrative and transactions cost are ignored. Counselling is done through direct marketing where the cost involved in creation of awareness is low as these institutions target mostly low or no profit at all. Their main objective is to improve the living conditions of those being afflicted by ‘the curse of poverty.’
2.2 Historical Background on Poverty Poverty is a complex issue which has always existed at different levels of society and in various forms across the world. Poverty has always existed but the fundamental question what causes it. However, according to the western conception, poor people are themselves accountable for their precarious situation. As the source of poverty lies in the socioeconomic system, the solution also must be at the societal level. A brief sketch of poverty’s history is given in Appendix II.
It is difficult to define poverty as there are various dimensions of poverty. Hulme and Mosley (1996) stated that microfinance is not a panacea for poverty alleviation and in some cases the poorest people were made worse off by microfinance institutions. On the other hand Rogaly (1996) argued that Microfinance Institutions had encouraged single sector approach to distribute resources to fight poverty. It did not prove to be beneficial to poor people as there was inadequate learning and change taking place. At times they even failed to reach the poor, the more so as they had a limited impact on income. They encouraged women to greater dependence on their husbands but were unable to provide additional services which were desperately required.
Therefore, poverty is a growing concern for all governments. They have taken a multi-dimensional approach to reducing poverty, with efforts including: promotion of economic growth; delivery of public services to all; transfer of assets to poor people and introduction of a social protection system. Thus, the persistence of poverty and inequality is clearly a key concern for government policy.
2.2.1 Poverty Approaches The literature on poverty is divided into two categories namely the monetary approach supported by utilitarian, and the non-monetary approach supported by the non- utilitarian. This utilitarian approach places the conceptualization of welfare in the utility space where satisfaction determines the level of welfare. But since utility is not directly observable, resources .i.e. income has been used to measure welfare whereas the non-utilitarian view consists of the faith based, livelihood and capability approach. This is illustrated below.
Figure 2.1: Poverty Approach Source: Adapted by International Development Research Centre From the above diagram, the monetary approach identifies poverty as a shortfall in consumption or income. An income below what is considered necessary to consume a minimum basket of basic goods would then be defined as the poverty line. The main assumption made by this approach is that consumers’ objective is to maximize their utility and that the ensuing welfare can be measured by their total consumption whereas the livelihood approaches emerged in the 1990s as a holistic framework for analyzing the factors that influence men and women in fulfilling their livelihoods, reflecting their perceptions of poverty and well-being. It also refers to the participatory approach of getting poor themselves to be able to understudy the root, causes and the victims of poverty.
Poverty is not a modern day phenomenon. It has been around almost since the beginning of civilization – from the time man was expelled from the Garden of Eden whereby he had had to start providing for himself. Poverty has always existed in human societies for thousands of years. This is all about the faith based approach of poverty.
Moreover, the capability approach, pioneered by Sen in the 1980s and 1990s, argues that monetary poverty approach measures individual’s well-being but fails to address the utility that individuals gain from others, their welfare. For Sen, capabilities are the abilities to satisfy certain crucial functioning up to certain minimally adequate levels. Thus according to him, poverty is the malfunction of some basic capability.
The concept of poverty is universally regarded as a multidimensional one. There is no unique formulation but it may consist in any form of inequity, which is a source of social exclusion from the basic essentialities of human dignity. Thus, the Oxford Poverty

The role of government in an economy

1. What do you understand by an economic system? Discuss the role of government in a market economy. Do you think that your government should play a more active role in the economy? Elaborate why and why not?
An economic system deals with the structure of production, distribution of economic outputs, and consumption of goods and services in an economy The development of economic system is needed in the national community that address the problem of economics like allocating resources and scarcity of the resource.
The economic system arranges the relationship among people, institutions and government in order to resolve the problem of economic. It confronted with the different basic economy questions that require answer such as what to produce, how to produce it and for whom to produce.
The contemporary economic systems is classify into 4 type including capitalism economy, socialism economy, mixed economy and Islamic economic. In capital economic system, all main economic decision is determined by private owners in capital market with minimal government interference also know as free market economy or laissez faire. Transaction on the prices of goods and services are determined in a free price system by the buyer and suppliers in open markets. The socialism economy is an economic system in which the central government controls most of property resource and major economic decisions regarding the production and distribution of goods and services through a central planning board’s. The central planning boards’ decide on the output between capital and consumers goods, and the capital goods are allocated among industries and enterprise according to government directives. A mixed economy reflects both capitalism and socialism to solve basic economic problem involve by both private and public sectors in allocation of good and service. Problem face by some of the public and private ownerships on the resource is based on supply and demand conditioned by price mechanism and economic growth of the country development. Therefore, government intervention in the economy for certain essential service such as illegal product categorized as unsafe goods like military items, and requirement such as schools, hospital, police force and army. And execute certain project or produce products that private sectors consider unbeneficial e.g conduction of low cost house in Malaysia.
The role of government in a market economy deals with problem associated with market failure. Market failure has negative effect on the economy because allocation of goods and service by a free market is not efficient. One of the causes of market failure is the existence of monopoly of power by certain party such as the price of resources is higher than marginal costs can lead to allocation of inefficiency and “pareto sub-optimal equilibrium” in the market. Inequality may also cause market failure through the economy, as the income of different group of individual lead to wide gaps of living standard.
Market failure can be corrected through government action or decision to reduce inequality by changes in tax and benefit system such as national minimum wage. Government has the authority to enforce property rights of ownership, protecting public property, encourages production and exchanges of goods and service [1]. Government has the roles to achieve economy stability and growth by attempting to maintain steady growth, provide high level of employment, and ensure price stability in the market. Through vital support in spending and tax rates it can slow down or speed out the economy growth [2].
Malaysia government play significant role in the economic growth of the country, by providing knowledge to the public on the current market and economic development through various tools such as through education and media. Malaysia government has the role to provide goods and service to public such as highway, education, national deference, security etc. Malaysia is the 29th world biggest economy in the world and based 16th largest in the world trading economy with a growth rate of 5% to 7 % since 2004.
Malaysia government provides the basic necessities to the public such as clothing, rent, fuel, utilities and transport and communication, where Malaysia government help reduce poverty among the rural population. The effective involvement of government in service and implementation of development program give a huge transformation to the nation growth.
. The involvement of Malaysia government in too many firm and industries could lose concentration and less focus on the development of several industries, this factor could lead to unhealthy competition among the private sector without control by the government.
[1] Mike P. McKeever,” The Mckeever Institute of Economic policy”, San Francisco in 2003
[2] “Government’s Role in the Economy” U.S Department of State. Taken on 10 March 2011
http://economics.about.com/od/howtheuseconomyworks/a/government.htm.
2. What are the characteristics of the Malaysian economy. Discuss its weaknesses and suggest appropriate policy proposals to srengthen the economy in order to realise the objective of becoming a developed country by 2020.
Malaysia economic system is based on mixed economy system that both free market and governments have significant effect on the economic development of the country [1]. By year 2009, Malaysia has reached per capital income (GDP/PoP) of RM 24,541(USD 6,812) and from 2004 to 2010, Malaysia economy growth performance at a sustained rapid growth averaging 5% to 7 % annually [2].
Malaysia economy is highly trade dependent of goods with several countries especially in the western market and Asian market such as China, Japan, Korean, and etc. Malaysia government also promote an open developing economy to private enterprises to take part in country development projects [3]. Malaysia is commonly known as a middle-income country, it functions by well distribution of wealth among the country population and equality among the public. Malaysia economy has been depend on export of product from raw material driven by manufacture exports such as electrical and electronic products, petroleum and gas (14th biggest world gas producer), palm oil products, rubber products and timber products. Malaysia economy also focuses on minor products to be export such as agriculture products, tourism, education, ICT, consultancy and etc.
In the early economy of Malaysia in year 1957 till 1994, Malaysia economic resource of product tin and rubber is exploit by the British. And in late 1970’s, the economic is export oriented industrialization stared with electronic industry at Free Trade Zone. The evolution and development of economy from year 1995-2009, based on knowledge-based economy (KBE) provide the platform where growth is focus on acquisition, utilization and dissemination of knowledge. These accelerate economy to a higher development of knowledge-based activities, innovation of product and intensification of Research and development activities. The changing of economy would strengthen Malaysia toward achieving the government vision 2020 to propel Malaysia to being as an advanced nation with sustainability of economy growth.
Malaysia government depends highly on the trade and export system economic, which expose Malaysia to worldwide economy recession. During recession period, economic hardship remain in the country and high rate of unemployment among the workforce affect the living of people in the country. The introduction large scale of foreign labour cause shortage of skilled workers in certain sectors such as construction and manufacturing leading in Malaysia work force whereby a foreign exchange exits drain in Malaysia economic. The domestic private sector failed to deliver target set by the Malaysia plan, where the domestic investors feels that the government is not focusing on domestic investment [4].
The government development plan, called the Malaysian Plan given way to strengthen the growth of Malaysia economy to achieve the ultimate objective aim for Malaysia by the year 2020[5]. The plan was focus on accelerating the growth of economy structure, divided into three sectors such as agriculture, manufacturing and services. A unit of agency under the Prime Minister’s Department called as Economic Planning Unit, is responsible for driven Malaysia’s through various measure such as policies and strategies for socio-economic development.
[1] Shri V.Mahalingam, First Secretary

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