Based on the opinion of the our readers we compile under four sections the most interesting answers of the experts previously interviewed in Progreso
What do you think are the key determinants of a country’s economic and social development?
Life in modern-day society is complex. It requires numerous complementary ingredients and, if just one of them is missing, it will have huge negative effects. Thus, two equally poor countries may suffer from the absence of very different ingredients. This is also why simple recipies, such as education, microcredit or “institutions”, are inadequate answers. But if I had to come up with a synthetic vision to encompass all developing countries, I would say that the secret to development or, in any case, the most difficult ingredient to accumulate is collective know-how or knowing-how-to-do things. The secret to prosperity is technology, but technology is expressed in three kinds of elements: tools or equipment, codes or prescriptions, and know-how or tacit knowledge. While tools and prescriptions are easy to disseminate, know-how is hard to spread, because it is acquired slowly through imitation and repetition, in the same way that we learn to walk or learn a language as children. Nobody learns to play a sport or diagnose a patient by reading about it. It requires years of practice.
Why does collective know-how matter so much?
It is a phenomenon with two elements that make it a major obstacle in development. First, modern technology often requires collective know-how, in that the task to be done can only be accomplished by a diverse but cohesive team. It is like a symphonic orchestra: in order to play a symphony, it is not sufficient to have one violinist, however skilful he might be. The capacity to create teams of people with sufficiently diverse know-how to be able to play the piece is often the most difficult aspect of disseminating a technology.
The second is that even if a violinist teaches his art to others, which allows the reproduction of the know-how he already possesses, he cannot teach others to play the oboe. And if nobody in the country knows how to play the oboe, then there is nobody who can train others for that instrument. The absence of oboe-players makes it imposible to play any pieces that require an oboe part. Thus, having the first person with a certain type of know-how is a challenge like the chicken and egg dichotomy: nobody knows how to do something that they have never done, but nobody can do what they do not know how to do. The main challenge in development is to find ways to resolve this issue, which is a problem of coordination.
This feature of development means that less developed countries not only produce less per capita, but also that they produce a lesser variety of products in general and those they do produce tend to be more simple, in that they require less collective know-how. They tend to be quartets rather than symphonies.
What advantages are there in strengthening the relationship between Latin America and Spain, on either side? What aspects of that relationship do you consider to be most necessary?
There is a community in which, despite there being multiple distinct identities, there are also common realities and overlaps. Such a community can become an association of interests, a cultural community, in the sense of an identity of identities, similar to others that have achieved significant results in international circles and in cooperation between our countries. Cultural and social exchange and trade between all the countries of the Ibero-American community have increased considerably and have much potential for further growth. Movements towards greater integration will become stronger when the trade among the countries of the region is as intensive as their overall regional trade is with other regions of the world.
Latin America is the region with greatest economic and social inequality. Despite economic growth, the reduction of poverty and inequality has stagnated, according to the latest ECLAC report “Social Panorama of Latin America 2014”. What do you think are the causes behind such stagnation? What recommendations do you have to encourage more equitable distribution of wealth?
I would recommend the formation of human capital. With a very young average age throughout the region, that would make development more egalitarian. As to the causes of the stagnation, it is clear that the world-wide economic crisis has hit very hard. The countries in this area suffered it less to start with, in part because Latin America had the advantage of a regional economy that is relatively under-banked, so it did not suffer the implosion of the financial system as much as some other places. However, it was impacted by the consequences of the crisis. Spanish financial institutions in these countries made a serious contribution to the way the financial system behaved with respect to the Latin-American economy. However, the consequences of world-wide economic stagnation are making themselves felt and have put the brakes on the growth of some big countries, such as Brazil and Argentina.
The solution lies in increasing redistribution of incomes, above all indirect income, such as through education and health. It is not a matter of growing so that the leftovers can flow down to the poorest in society, but rather to grow with a model that prospers and redistributes. When this cannot be done through wages, because the south is competing with the south through wage levels, the redistribution should take place through indirect mechanisms, such as access to education or access to health, which gives additional income and enhances human capital.
How would you describe the performance of the Latin American economies and societies over the last 25 years? How has the performance of the economy and politics impacted society and human rights in the region?
It is too easy to make the mistake of generalizing when you are asked about such an enormous region with such huge differences between the different countries. I hope that this will serve as an initial disclaimer, making it clear that not everything I say can be applicable in the same way to all the countries.
However, the region has enjoyed three decades or more of governments chosen by the votes of their people. This is an extraordinary feat for a region so accustomed to coups d’état.
In just over a century, we have gone through three waves of democracy in the region. The latest one began in the eighties, and has been the most comprehensive and the longest lasting. Although it has its difficulties, it seems unlikely that the tide can be turned back now. We cannot and we should not forget what an enormous achievement this has been.
Nonetheless, despite the progress, the rule of law is far from being what one would hope. Democracy in the ballot box has not consolidated any procedures to strengthen democratic institutions. It has not prevented overly strong presidential systems with strong personality cults from overshadowing and weakening them. Only when we manage to establish such procedures will our democracies stand on a sound footing.
In terms of economics, too, these decades have been very varied. There are enormous differences, for example, if we compare the eighties, the “lost decade” (which, as an aside, I might point out was the best decade, as it was when democracy was recovered) with the first decade of this century, when the economy grew thanks to rising commodity prices.
Yet despite enormous growth in the last ten years, the great majority of Latin-American countries are still highly dependent on international commodity price cycles. Until there is greater industrialisation, this dependency will continue. The sad thing is that it not only affects the economy, but also politics, and society as a whole.
For human rights, the return to democracy, almost by definition, was like coming out into the light after the darkness of the dictators and setting off down the long road towards increased protection of human rights. Along the way, the response from the different states is impossible to generalise. For example, in judging liability for human-rights violations committed under dictatorship, countries like Argentina have made enormous progress, but others, such as El Salvador or Brazil are dragging their feet.
Important progress has also been achieved in the respect and/or protection accorded to certain vulnerable groups; for example, in the right to land for indigenous peoples or equal marriage rights. In human rights the path ahead must always be longer than the path already trod. And true enough, beyond the formal rights of women, the discrimination against women continues to be the biggest challenge we face in the region. Latin America is the worst region in the world for gender-based murders of women, with over 50000 a year. In general terms, although the fight to equality has won formal rights for indigenous and Afro peoples and LGTBs, in practice they continue to suffer discrimination.
You have sometimes said that the international organisations have lost the spirit that inspired the Universal Declaration of Human Rights in 1948. How do you think it could be recovered to drive a common platform for defending and protecting human rights?
True. The spirit of 1948, with the Universal Declaration and the explosion of declarations, conventions and standards of all types to defend and protect human rights, no longer exists. Our region was a pioneer in the defence of human rights. The American Declaration was made prior to the Universal Declaration. But the spirit of Bogota, where the OAS was created and the American Declaration approved, does not exist any longer either.
In my university classes, I speak of the four pillars underpinning any system for protecting human rights and how necessary it is for all of them to work properly. They are: states, regulations, international institutions set up to supervise compliance with the regulations, and civil society, as the main driving force.
It is clear that nowadays many states do not have the will to uphold these rights in practice, however much they may praise the wonders of human rights. Recently, the OAS culminated a process that the member states called the Strengthening of the InterAmerican System of Human Rights. However, after more than two years of discussion, the states did not come up with one single idea to really strengthen those rights. Quite the contrary. Their only aim was to hamper what the InterAmerican Commission on Human Rights was doing, so that it could not go on performing its duties with the independence that was its hallmark in the seventies.
The spirit of 1948 will be difficult to recover, especially under current conditions worldwide, with new security threats reviving the false dichotomy between security and human rights.
It is also necessary for many current leaders in Latin America to stop politicising human rights to score their own political points. Only when we manage to unite all the political, social and economic forces under the banner of human rights will we be closer to calling out the first letter of the word “victory”.
What do you consider to be the causes behind inequality increasing, even as GDP rises in Latin-American countries?
This is a tremendously complex issue, which possibly varies from one country to the next. But I can imagine two key determining factors, among many:
- The declining quality in education, as it lags behind advances in technology and the information economy, while more complex processes of value generation require human capital with high-level specialisation. The holders of this human capital (engineers, system designers, software and robotics producers, etc.) can use it to earn high incomes. However, less qualified workers, with less such human capital, are held back by the shortcomings in education systems that have not kept up with the times and do not enable them to improve their productivity or their wages. So the incomes of the highly educated continue to go up while the low-skilled workers, without much education, are stuck where they were. And the gap widens, even among people who depend solely on their work to generate income.
- At the same time, in some countries there are high legal, regulatory and bureaucratic barriers to moving from the informal economy to the formal economy. This is an issue that could be of great interest for your journal. How much does it cost to get a licence to operate? How much does it cost to get through the red tape? What are the asymmetries between being regulated or unregulated, in the formal or the informal economy, when you factor in taxes, requirements and other charges? All this leaves a lot of people trapped in the low-productivity informal economy. And these barriers prevent small family businesses becoming small firms that might employ say ten to fifteen workers, simply because it would require them to jump through so many hoops that doing so becomes horrendously expensive. It stops them before they start.
From your viewpoint, what were the main lessons you learnt from being a board member of theInstituto de Microfinanzas de Acción Internacional?
Microfinance grew out of a very simple idea: granting credit generates fixed costs of evaluation and monitoring. The cost of processing and evaluating a USD 10,000 loan is not that different from the cost of processing and evaluating a USD 100,000 loan. To recover such costs, the bank has to charge more on the 10,000-dollar than on the 100,000-dollar loan. Below a certain size, it does not make sense to lend, because if you want to recover your fixed costs, the interest rate on the loan would be unpayable. That is why 100-dollar loans tend not to don’t exist.
Microfinance is based on reducing the fixed costs to extend the credit market to smaller borrowers. So far so good. The problem is that an unrealistic discourse and unreachable expectations were added on, going beyond just the economic improvement.
The assumption that led to such enthusiasm was that if people managed to access capital, it would radically change the world. But the world has not changed and all serious assessments of microfinance find small and often negative impacts. Microfinance is much older than mobile phones, but nowadays there are billions of people with mobile phones and only hundreds of millions with microloans. That is a very small part of the banking system, even in Bangladesh. As I see it, this reflects the issue of know-how. I can give capital to all the women in a neighbourhood. But if what they know how to do is to set up a small bar or sell sweets, the returns on the capital will be very low and possibly below the cost of the loan.
Moreover, microfinance was not designed to select high-potential businesses and accompany their growth. Group borrowing based on solidarity obliges each entrepreneur to insure the other members of the group and this makes them reluctant to bear the risks of others. It is the opposite model to what venture-capital funds follow, where it is equity rather than debt that is invested, and one success pays off many failures. The more we broaden the availability of micro-debt, the more important the know-how constraint will become.
How do you see the medium-term future of the industry? What role will commercial banks and microfinance institutions play? Do you think the growth of this sector will slow down?
It is now fashionable to talk about financial inclusion. I think we should recognise various things here:
First, microfinance is an innovation for producing specific types of financial services, essentially for self-employed workers, family firms, small businesses, etc. It is one way of achieving financial inclusion, but not the only way.
A second observation is about a major paradox. On the one hand, mainly in a large metropolis such as Lima, Bogota or Quito, financial inclusion is substantial and even certain segments of population are over-indebted. On the other hand, in the same countries there are regions where the population is essentially excluded. This coexistence is a very typical phenomenon in developing countries. You have over-borrowing for some and a total absence of institutional access to borrowing for others.
The future is to be found by resolving this paradox. This will entail discovering institutional, regulatory and technological mechanisms to reduce the incidence of over-indebtedness. And, at the same time, there must be a new wave of innovations, to enable us to reach out to where there is no institutional supply of financial services at all yet. Where there is nothing, there will be enormous opportunities for growth.
Perhaps the saddest thing is when the job is botched, when the credit decision is low quality and people are given more credit than they can afford. All they get is an ephemeral, transitory and fragile inclusion. Then, when it ends, they fall into a black hole, even harder to get out from than where they were to start with. They are penalized in credit bureaus, lose their reputation and are unlikely to be granted any further loans.
Who could do what is needed? A diverse range of entities; there is room for different kinds of players: banks, non-bank microfinance institutions, even some NGOs highly specialized in certain segments of the population. Each of them could operate alongside the rest, because they would have competitive advantages operating in some market segments and not in others, and vice versa.
However, we could imagine that commercial banking will continue to have a corporate emphasis, and it will take advantage of new information and communication technologies to develop transactional services, above all payments systems, money transfers, public utility payments, etc. The people who are currently customers of microfinance entities will also have access to these services. Nonetheless, at the end of the day, the banks that are newly trying to enter the microfinance sector with credit services are going to lose the game against the entities that started up doing microfinance, which will have already developed strong relationships with their customers.
Because history matters. Arriving ten years earlier means ten more years of learning, ten more years of getting to know your customers and developing loyalties. You can’t reproduce that from one day to the next. Moreover, the banks’ corporate culture doesn’t allow them to have the patience to enter into this segment for ten years just to see if it might work out. Either they get an immediate payback when they try it or else, as soon as they don’t do so well, they will leave. So I think that for the segment we are talking about (household-businesses, small self-owned firms, production-oriented microenterprises, etc.), the entities that have a microfinance focus and a microfinance technology, those that have cultivated direct relationships with their clients, are the ones that will survive in this segment of the market.
We are clearly entering a new stage in microfinance. There has been a structural discontinuity in what we could call the natural rate of growth in this sector. The first stage was about filling the void, at a time when one could grow very fast. But in any area of life (in physics, biology, markets, etc.) never-ending exponential growth is impossible. In the places where they have been operating (the others are still empty), these entities face a new era of slower growth, which we hope will be more prudent. For the larger entities, with a larger scope of operation, growth opportunities will be in new regions, new kinds of customers, new kinds of products, in a greater range of circumstances, rather than in doing more of the same in the same places that are already saturated.
¿What are the main points that microfinance legislation should cover for sustainable development of the sector?
The regulator must understand that microfinance is different. But the difference that matters from the regulatory viewpoint is not that of good intentions. It is not that a different regulation is needed because the customers are poor or because they are women. Rather, it needs a different kind of regulation because the risk profile is different and because the credit methodology used to analyse this risk profile is different from the one that traditional banking applies. It the regulator does not realise that it is different, and tries to apply the same rules to both traditional banking and microfinance, as if they were the same thing, this will never be efficient. So that’s where it has to start.
Second, the regulator needs to recognise that the costs of reaching the previously unbanked population are higher and behave differently from the costs of commercial banking. Consequently, it should not interfere in price-formation policies, because these must reflect the cost differences and make sure the institutions are sustainable. And also, when distinguishing between risks, the regulator must clearly understand that consumer loans for wage-earners have a completely different risk profile from credit for self-employed customers working in a productive activity rather than drawing a wage. It you treat consumer lending the same way as microfinance, you kill microfinance.
There is definitely a lot of debate right now about the need to protect customers. It is obvious that if microfinance is a more customer-oriented business, on the grounds of minimal respect, there must be transparency and fair play towards the customers.
And what message would you give people who work for the BBVA Microfinance Foundation Group, which seeks a better future for disadvantaged people through Responsible Productive Finance?
Microfinance is one of the most powerful instruments for a country’s development. If we imagine the cell is the family and the corporation, with microfinance you can act directly on the vein. It is like the lifeblood that enables the organism to work. As a financial institution you have direct contact with SMEs when you provide them with loans. But you are not a charitable institution; you’re a business concern that reinvests its profits and has to be careful about recovering its loans. This is important because it imposes market discipline on this fledgling sector. Your role is fundamental for its development.
The Foundation holds workshops on corporate governance on a non-profit basis in Latin America, to encourage the implementation of formal, transparent governance frameworks in the sector. What influence do you think establishing best corporate governance practices has on the economic development of a country?
Latin America must make an enormous effort to improve decision-making processes. The public and the private sectors must work together to sustain development in the medium and long term. But there is one thing that must be given top priority: institutions need to make decisions in a more efficient, more predictable manner. Good corporate governance practices are absolutely vital at all levels. It is not possible to make entrepreneurs accountable when there is no predictability about their future, if when they project their investments, they are just making speculative, short-term bets. To sustain investments in the medium and long term, investors need to know that what they do has predictable outcomes; that they do not have to go for an immediate killing because there is enough space for them to recover the investment and take part in the development of the countries where they are investing. There is a lot more argument over legal certainty, which is really implicit in what I am saying. We need foreseeability and efficiency in the decision-making process. I suggest we require an enormous effort to enhance institutions (both businesses and the government) so that they can process decisions well and provide visibility of the future in the short, medium and long term.
How important is corporate governance for the sector’s transparency and restructuring?
An entity’s performance, how much outreach they have, who they service, the quality of their services, how efficient they are, will very much depend on the decisions taken by all the stakeholders: credit officers, branch managers, regional directors, the risk unit, etc. And these decisions are not taken in a vacuum. Rather, they will be a response to the incentives structure, which says what consequences there will be for me, for the others, for our mission, if I behave in one way or another.
The key role of corporate governance is to appropriately and clearly define the incentives, reward structure. Some rewards will be monetary and others not, such as the possibility to grow professionally, job stability, being given tasks that you find stimulating, and suchlike. A structure where doing things well is rewarded and doing things badly is punished one way or another. But what is to be done must be clearly understood. Designing this kind of incentives structure is not a trivial endeavour, because you need insight into what drives people, what motivates them to do things well.
Your firm has taken part in several of the biggest mergers and acquisitions in Peru. From your point of view, what is the importance of good corporate governance?
The corporation is a cornerstone of the economy and society. From the time we become adults until we die, we have a very close links with corporations: they give us services, education, healthcare, they administer our money; it's as important as the family. And corporate governance defines how these corporations behave. Good corporate governance is a corporation’s code of conduct. It is transparent; rigorous in observing the rights of its shareholders; complies with regulations; treats its workers well; respects the environment. But this doesn't only apply to large corporations. It's crucial that these practices should have a "trickle-down" effect and be adopted from the very top right down to the bottom.
How does a statesman like you conceive of equality between men and women? Have you observed significant progress in the role of women in business?
I see it as an urgent need that all governments must support. I sometimes say that they should do this even if only out of self-interest. What business can afford to miss out on fifty per cent of its workers for reasons of gender… or any other difference, come to that? It would be ruinous! In society we have to become aware that we cannot write off 50% of our citizens with all their qualities and their value and potential. It is very likely that we are seeing a fight of power. Men fear losing their pre-eminence and fight desperately to avoid an equality that becomes more unavoidable with every day. In the business world, equality is a long way off, especially at senior management level. But that is not the case in politics, where equality is more visible in this region of the world, with three women heads of state.
Latin America has been a pioneer in establishing a legal framework to promote public policies that guarantee gender equality. However, the region reports very high indices of femicide and gender-based discrimination. What public and private measures or policies are necessary to foster greater respect for women’s human rights in the region?
You are right that Latin America has been a pioneer in positive-discrimination laws to advance gender equality and the political representation of women at the highest levels of government. At present, it is the region with the highest ratio of female members of parliament, well above the average world-wide. At the same time, there is probably no other region that has elected so many female presidents as Latin America has over the last ten or fifteen years. So we can see positive examples of progress towards gender equality in the region. However, gender violence is still a very open wound in the region.
The fact that about 15 countries in the region have had to change their criminal code to establish the crime of femicide, so that the murder of women simply because they are women could be included on the statute book, is a very negative symptom. Throughout the region, there is great concern about the high figures of gender violence and femicide we suffer. That means we have a long way yet to go.
Likewise, in the economy, although there has been a massive incorporation of women onto the labour market, it is also true that the wage gap between men and women has not disappeared. There is still a major wage gap, whether you measure it for the same work or the same educational level.
This means that despite the gains, both in the political arena and in the economic and social spheres, women continue to encounter considerable, often invisible, barriers and manifestations of discrimination in the exercise of their rights.. So gender equality must continue to be a touchstone for all action programmes of governments, public policies, and international bodies.
More than half the women in Latin America work under precarious conditions in the informal economy, with very limited access to the social security system. What would be necessary to bring women out of the informal economy and offer them some kind of safety networks?
This is a very important question. The over-representation of women in the informal economy is a fact, as is women’s low level of coverage from pensions and social security. I believe we must act on several fronts: first of all, to attain measures to improve home-work life reconciliation, which becomes a central piece to also achieve better societies in the future. The issue of home-work balance does not only concern women. It also involves men. We must have more policies and rules recognising the need for reconciliation of work and home life, with maternity and paternity leave; better hours; more flexibility, and days or hours that can be used to deal with family needs and emergencies. And these things must come to be seen as natural in the workplace and not something that is going to hamper women’s possibilities of moving up the business pyramid. They are fundamental elements of equality. This would also help to move women out of the informal economy because many women have no alternative but to work informally, simply because they do not have anyone to look after their family when they work.
The second front is the need to develop the care network much more. Women who do not have access to the care network cannot move into the formal labour market, because they have no support infrastructure. I want to emphasise that the reconciliation of home and work is not just a matter for negotiation within each household, with one’s partner. It is a social issue. It is the joint responsibility of the labour market, the state and society as a whole, alongside the families and couples involved. And this is very important, because it is also a matter of the capacity to socialise future generations. It is something that we should all concern ourselves with.
Moreover, we know that women’s capacity to move into the labour market and generate income is a vital part of the fight against poverty. On average, in Latin America poverty is about 10 percentage points less when there is female income in the household. So, strengthening the care network affects the mental and social well-being of future generations, the fight against poverty and the construction of fairer, more equitable societies.
The third front is programmes to give women access to credit and training, which are a fundamental element in equalling out opportunities for the future.
Regarding the social protection system, access to the formal economy triggers the social security benefits that are linked to it.. There is an interesting debate going on about whether social security systems should be reformed so that they not only protect workers in the formal economy, but also in the informal economy. That is, social security systems should be decoupled from the formal or informal nature of the job, and linked much more to the individual and his or her income.
This is a very broad-ranging debate, and it is linked to the discussion about whether countries should go for contribution-based systems or tax-funded systems. I am convinced there should be a combination of the two. Latin American countries, with their high levels of inequality and fiscal burden, cannot move towards a Scandinavian-style system where social security is financed by taxes paid by everyone. Contribution-based systems are important, so we should be able to follow the example of Costa Rica, which is to have a multi-pillar system. Costa Rica, Colombia, Mexico, and more recently, Brazil have all implemented multi-pillar systems. A serious discussion of the pros and contras of the solutions or proposals that have been developing over the last few years are advisable and necessary.
The gender issue is also involved in this debate, for example in the discussion, which has not been resolved, about the trade-off between the age of retirement and the density of contributions paid in. The possibility of women being pensioned earlier was a demand which I think will have to be replaced by a pension age relating to the density of payments into the system, which is the real problem for many women who are not entitled to a pension. Since women tend to move in and out of the labour market (precisely for family reasons, such as taking care of children and the elderly) and sometimes are engaged in the formal and sometimes in the informal market, the number of contributions necessary for a pension becomes an insurmountable barrier to getting a pension. It is rather paradoxical that many women finance part of the system, without ever receiving any benefit.
Do you consider microfinance to be a useful tool for empowering women and supporting their social and economic development? What do you see as its greatest strengths and weaknesses and how could its impact be enhanced?
I think that studies demonstrate that access to credit and microfinance has been an enormously useful tool in empowering women. We all know about some of the most successful instances world-wide, such as the Grameen Bank. But several schemes have been developed specifically to give women access to borrowing.
Several people believe that microlending should be subsidised credit. Personally, what I see is that women have no access to a formal system where they are able to borrow quite small sums, so they often fall into the hands of loan-sharks and end up paying unnecessarily high interest rates. It is doubtlessly true that microlending interest rates are higher than on regular bank loans, because they entail higher transaction costs. However, even if the interest rates are higher, they are still a much better option than going to the local loan-shark in your community. This is the strength of the microfinance model.
I think its weakness is when the systems are precarious; when they fail to include the elements we spoke of earlier, for giving women skills and supporting their ability to manage small enterprises. What are most expensive are precisely the support measures, when we are trying to reach out to these more vulnerable sectors, often without much formal education. It makes sense to charge higher interest rates if this gives women access to services that will enable them to use loans for their own personal and economic development.