Microcredit and Democracy in El Salvador

I just returned from a few days in El Salvador to study the connections between poverty and democracy....

As my taxi sped from the airport towards San Salvador, I couldn’t help but think that this is the same road where four nuns, all U.S. citizens, were pulled from their car, raped, murdered, and thrown in a shallow grave. This turned out to be just one of many acts of terrorism unleashed on the Salvadoran people by their own government and military during the terrible years of civil war in the 1980s. By the end of that decade, the war had claimed the lives of over 75,000 Salvadorans, mostly civilians, mostly campesinos, but also hundreds of clergy, including the Catholic archbishop of the country, Oscar Romero. This brutality, visited on the people of El Salvador in the name of anticommunism, was vigorously sponsored by the Reagan Administration as the country became caught up in the endgame of the Cold War.

When the Cold War ended, so too did the civil war in El Salvador as the U.S.-backed right wing government and the revolutionaries negotiated a peace agreement with the help of the U.N. The Peace Accords signed by both sides were hailed as a “negotiated revolution” that had the potential to significantly restructure the social and political conditions in the country, leading to meaningful democratization – something that the people of El Salvador were never previously allowed to have.

The roots of El Salvador’s authoritarianism lie in widespread poverty and extreme inequality. The country had always been tightly under the control of a very small landowning elite, dubbed the “fourteen families.” This wealthy elite had traditionally been able to hold on to their extraordinary economic and political power by co-opting Salvadoran political leaders, using the military when necessary (even allowing generals to hold the presidency for much of the twentieth century), even as the vast majority of Salvadorans lived in obscene poverty without adequate means of changing their situation through legal and political channels. Whenever ordinary Salvadorans challenged the status quo or attempted to organize for political change, the political and military (and usually religious) institutions could be counted on to make sure that citizen demands were dealt with appropriately (in 1932, a peasant uprising was “dealt with” by the military unleashing a reign of terror – 32,000 peasants were murdered in the course of a single week in a massive bloodletting that came to be known as La Matanza). As political unrest again gained steam in the 1970s and 1980s, the Salvadoran elite once again turned to their trusted allies in the government and military, as well as their willing benefactors in the U.S. government who provided training and money (up to $1 million a day in military aid during the early years of the 1980s). This time, though, the outcome would be different, as the opposition would not be terrorized into submission and the government was forced to negotiate.

The Peace Accords were “revolutionary,” and they did hold out hope for democracy. I have always been skeptical, however, whether real democracy can take root when deep poverty and vast inequality continue to exist. And Salvadoran economic policies over the past twenty years have only served to deepen that poverty for most people. So, if poverty and inequality provide the foundation for authoritarianism and political violence in El Salvador, what hope does the country have for real democratic change?

In recent years, the concept of ­microcredit­ has been floated as a method for substantial poverty reduction. Microcredit involves very small loans to very poor people for small businesses in order to provide a little income for their families. Loan sizes range from $100 to around $2000, and the enterprises are very modest – perhaps selling fruit or tortillas on the street or having a small convenience store or barber shop (often operating in the home). The idea is different from traditional philanthropy, in that these are loans, not grants or handouts. The micro-entrepreneur is expected to pay back the loan (with interest), the idea being that this is true “bootstrap” capitalism that allows for innovation, self-reliance, and real economic progress for the recipient. This also differs from traditional credit, in that the borrowers are people of extremely modest means, who almost never have the collateral demanded by lending institutions for traditional loans. The concept was pioneered by Muhammad Yunus, founder of the Grameen Bank in Bangladesh (and winner of the Nobel Peace Prize in 2006), who claims that “credit is a human right.” Yunus’s book Banker to the Poor is an excellent introduction to the origins and philosophy of microcredit.

I am interested in the connections between microcredit and democratization in El Salvador - Traditional economic models have largely failed the poor majority, and microcredit is rapidly gaining steam as a legitimate alternative to poverty reduction, one person at a time. It’s the social component to microcredit, though, that intrigues me. Many microcredit institutions require borrowers to form “solidarity groups” in which the entire group receives the loan, and the entire group is responsible for paying the loan, even though the members have individual businesses. This creates a strong component of interdependence in the lending process, in that each member is responsible to and reliant on every member of the group. This interdependence can only work if there is a high degree of trust between the group members, as well as transparency in the process.

This solidarity group model, and the norms of transparency and trust that go along with it, create what is has been called “social capital.” This social capital is an integral component to democracy, in that it gives individuals experience in democratic citizenship – the most important of which might be leadership skills and community involvement. These are the building blocks of successful democracies and the basis of a democratic civic culture.

I traveled to El Salvador in February 2008 and February 2009 to learn more about microcredit and to research the creation of social capital through microcredit participation. I spoke with representatives of several microcredit institutions about their operation methodologies and also spoke with a cross-section of clients. My initial thought on my conversations is that participation does create social capital – the reciprocity inherent in the solidarity group system does create bonds of trust and interdependence, and people do learn the leadership and community skills necessary to be involved citizens in a democracy (as well as learning many financial and business skills).

Microcredit alone cannot solve El Salvador’s poverty or be its democratic savior, but it does fill a gap - it provides a financial lifeline to many Salvadorans, and it provides another avenue for creating the democratic society that the Salvadoran people greatly deserve.