Angelina Cotler, Ph.D., Associate Director, Center for Latin American and Caribbean Studies

What kind of small business would you able to launch or expand with a monthly loan of $50 at 3% interest in a highly competitive market? This is a poignant-question that low-income Peruvian women who participate in micro-loan projects sponsored by local Non- Governmental Organizations (NGOs), ask themselves every month.
Traditional and informal micro-finance programs are not novel. In different forms and contexts they have long been present in most developing countries. Broadly, they range from Rotating Savings and Credit Associations (ROSCAs) that play the role of insurance and consumption funds among friends, neighbors or relatives to local loan sharks, to self-financing from relatives and friends, to more formal sources of credit promoted by commercial banks, cooperatives and NGOs.

Only since the mid 1990s -- coincidentally when the implementation of economic neoliberal policies reached a peak in Peru -- have micro-loan programs funded by micro-financial institutions (MFIs) expanded to become profitable and vocal advocates for women's empowerment and economic development. 

The novelty of micro-credit projects is at present their global trademark: a transnational phenomenon that offers capital to people classified as "not credit worthy," irrespective of social and cultural differences, and funded mainly by international lending institutions. Access to micro-credits does not depend on collateral; on the contrary, it is based on the trust and the social capital of the beneficiaries; in other words on their social organizations. The appeal and success of this new model lies in the simultaneous retrenchment of the state as the main promoter of development replaced by MFIs and NGOs, and the pervasive ascendancy of a new liberal discourse, which presents micro-entrepreneurship as the only solution for eradicating poverty and empowering women. The rhetoric that micro-entrepreneurship offers a "way out of poverty" sounds promising and attractive. My study in Peru, however, throws light on the difficulties women experience in establishing a profitable business and keeping up with the monthly payments on the loan.
During the late 1980s, the government of Alan Garcia in Peru put into effect some economic stabilization policies. But it was not until 1990, when Alberto Fujimori assumed power, that the country faced drastic economic cutbacks. At that time the country was going through a deep economic crisis and a civil war against the Shining Path insurgency movement that started in1980; the population was despaired, distrustful and frightened. Reversing his campaign promises, the Fujimori administration adopted a dramatic economic shock policy that stipulated privatization of major state companies, labor deregulation, severe reductions in welfare programs, and the elimination of subsidies for basic goods. The consequences were devastating: basic foodstuff and electricity prices skyrocketed overnight, gasoline prices jumped a staggering 3,000 percent (Bowen 2000) and consequently, poverty levels rose dramatically, engulfing 49.6 percent of the population, of which 20 percent fell into extreme poverty (Béjar et. al 1996).
Grassroots organizations, primarily communal kitchens in cities, buffered much of this shock. At work since the late 1970s, these self-help female neighborhood organizations constitute an urban survival strategy to collectively feed families. Their main goal is to decrease the cost of food. Communal kitchens practice economics of solidarity based on the principle of redistributive responsibilities, encouraging women to organize teams to share the workload, from buying products in bulk, to cooking meals, selling food portions at low cost, and keeping the accounts. Food kitchens revolve in the domain of the immediate and the precarious; their capacity for savings and planning is almost null; therefore, they are not organized according to an entrepreneurial criterion. However, communal kitchens represent important spaces to build and strengthen social networks and ultimately they forged female grassroots leaders at the neighborhood level.
Strong social networks are critical for small-scale productive activities. Networks give access to other individuals who can be included in one's project, with whom alliances can be established, and relations of solidarity and reciprocity maintained. It is on this prior social capital, trust and closeness that the micro-credit approach of Solidarity Groups (SGs) is founded.
Based on the success of the Grameen Bank in Bangladesh, this micro-credit methodology operates on the principle of group-based lending, which involves small self-selected and homogenous borrowers' groups, jointly liable for loans. In Peru, these loans are primarily offered to members of communal kitchens. No collateral or proof of assets or bank accounts is required. Joint liability means that each member of the group stands as a guarantor for another member's loan; in case of default of any of its members the lender can deny further credit to the whole group. While this prerogative serves the lender's interest it fosters a high level of group control and ignores the pervasive distrust that exists among the members.
Micro-credit programs stress the importance of the social fabric and praise cooperation among low-income women's groups as well as their pivotal role in poverty-relief community programs (such as Communal kitchens). However, this unrealistic perception has created a set of expectations about women's roles in development projects with negative effects. The familiar assumption that women are naturally predisposed to serve their communities made them the primary target for voluntary--unpaid and consequently invisible -- work (i.e. health campaigns and food programs). A second effect is the idea that women's capacity as shock absorbers can substitute for lack of resources and sound policy measures. Finally, there is the myth of the unlimited resourcefulness of the poor, an endless capacity for survival no matter how drastic the economic setbacks.
The cases of SGs I studied showed mixed results in terms of the intended goals of economic success, self-sufficiency, and economic sustainability. Achievement depended on previous knowledge (of how) to run a business; the support of the family; and the quality of the training provided by NGOs. Situations like the one faced by the SG "Amazonia" were common. This group invested the business loan to buy imported cheap cosmetics and second-hand clothing. They set up an informal market stack on a main avenue in the northern sector of Lima and organized shifts to sell their goods. Struggling with many competitors, they attracted clients, but many of these were friends who bought on consignment, creating problems of cash liquidity. When the hour of repayment to the NGO came, they had to go to a local loan shark for another loan, starting a vicious cycle of indebtedness.
There is one case, however, that deserves closer attention despite its ephemeral economic success. In 2000, when the scandals of human rights abuses and economic embezzlements of the Fujimori regime came to light, the Colectivo Sociedad Civil, a group of artists, started a national campaign of washing the national flag in public spaces. The idea was to clean the nation--embodied in the flag-- of the filth created by that government. This was a political project that inspired a modest economic project.
The SG "Sarita Colonia," formed by seven women who belonged to a Communal Kitchen, received a $500 loan from a local NGO (from funds of the Spanish Cooperation) a few days before the 9/11 attacks in the U.S. The group brainstormed some ideas on how to invest their money: a market stall to sell vegetables, a down payment for a motorcycle taxi, or renting computers to start an Internet cabin. All these ventures seemed too risky and required more capital (than they had). On the morning of 9/11, as the members prepared the meals of their CK, the images of the attacks replaced the familiar soap opera. In the following hours the women witnessed multiple manifestations of American patriotism, many involving the display of U.S. flags. Even though they did not understand the reasons or implications of these attacks, the ubiquity of the flags grabbed their attention. The recent ritual of washing the Peruvian flag and the currency of U.S. flags gave them the idea of manufacturing them for sale. It is not commonly known that in the days following these events, the U.S. Department of Defense ran out of small U.S. flags due to overwhelming demand by embassies, consulates, schools and companies abroad. Clara, the leader of the group, laid out their idea of manufacturing U.S. flags to their acquaintances in the NGO.

The U.S. embassy approved the idea and commissioned one thousand flags, to be produced in two weeks.  The embassy agreed to pay $3.50 for each flag and provided a cash advance of 30% of the total sum. For a few weeks the CK closed its doors and all its members set down to work in the venture. With two borrowed sewing machines and a prototype flag (which ironically had only forty-eight stars), the group delivered the flags on time. The Solidarity Group repaid the loan, compensated the women who were hired, and each of the seven members of the SG earned around $500. These profits exceeded their expectations; however, none of them went into another venture. The risks were too high and jealousy among them too great.
Micro-credit programs can lead to minor successes as the one illustrated here, but even then they rarely lead to permanent profitable businesses. At most they represent a flicker of achievement that provides an unexpected windfall.  At worst they can open the door to a cycle of indebtedness and smashed hopes. One can look at these programs as a political project but their technical achievements, such as the high interest rates and the dependency on the liability of the group, on one hand, and the weakness of the market economy, on the other, are mediocre. Certainly short of what exaggerated reports make them out to be.
Low-income women at the neighborhood level rely heavily on the social organizations for daily survival. The strength of these relations and the social capital they establish is used by micro-lending institutions as the guarantee to access credit. However, economic crisis and a civil war that has lasted twelve years have damaged the social fabric of community groups.

Notes
Bjar, hector, Roelfin Haak, and Eduardo O'Brien (1996). Uno de cada dos. Per Informe. Lima: CEDP, FOVIDA.
Blondet, Cecilia and Carmen Montero (1995). Hoy: Menú Popular. Comedores en Lima. Lima: UNICEF, IEP.
Bowen, Sally (2000). The Fujimori File. Peru and Its President 1990-2000. Lima: A Monitor Publication.