Micro-Loans Snake Oil Panacea Or Pathway To New Economic Paradigms

This weblog has skirted around questions about micro-credit, micro-loans and micro-finance in the past. They were either related to other economic issues or links to online programs like Kiva. Recently, a number of articles have passed by my computer screen inspiring me to learn more. Two articles in particular caught my eye.

Microfinance's Success Sets Off a Debate in Mexico - New York Times

They are the center of a fractious debate: how far should microfinance go toward becoming big business? At one end stand traditional microlenders, like the economist Muhammad Yunus, founder of the most famous microlender, the Grameen Bank, and winner of the 2006 Nobel Peace Prize. At the other are the Two Carloses, as they are widely known in this tight-knit world that gave them their start as starry-eyed idealists.

U.S. 'micro-loan' effort yields big results in Iraqi province - Los Angeles Times

Al'laur Abd Mottar, 50, had a dream of starting a business to support his wife and eight children. He would buy and sell scrap iron, a material much in demand as residents seek to rebuild homes and businesses damaged by fighting between U.S. Marines and insurgents.

In November, Mottar got a $3,000 loan from a program underwritten by the U.S. Agency for International Development that is bringing the "micro-loan" concept to war-ravaged Anbar west of Baghdad.

To oversee the micro-loan program, USAID turned to the Louis Berger Group, an international consulting firm based in Morristown, N.J. Supervision of the micro-loans is only a small part of a $154-million contract between USAID and the firm to promote economic growth in all 18 provinces.

Different paths but same destination, either small entities becoming large ones or large entities taking over the territory of small ones. Although the micro-lending industry began in the 1970's, it it is in the last few years that is has been around long enough to have raised some issues and gendered some controversy. Some of these issues have basic economic principals behind them, some are overly optimistic predictions, and some are simply human greed. The following link to the Tyler Cowen's post on this subject provided some rationale economic insight and some history.

Marginal Revolution: My micro-credit essay with Karol Boudreaux

For better or worse, microborrowing often entails a kind of ­bait ­and ­switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the ­alternative—­such as no doctor's visit for a child or no school for a ­year—­is much ­worse.

This 2006 report provides a rosy outlook from a more liberal-progressive perspective.

The Chronicle, 7/20/2006: The Big Promise of Small Loans

Microfinance, pioneered in the early 1970s by nonprofit groups like Grameen Bank, in Bangladesh, and Acción International, in Latin America, is one of the hottest ideas in philanthropy — and it may become the next big thing in the investment world, too.

The overly optimistic and idealistic perspective is not limited to the liberal-progressive outlook. From the other side of the spectrum

The Entrepreneurial Mind: Cynicism about Free Enterprise

It takes time to build wealth. And real wealth comes from free enterprise. Are microloans the answer to transform an economy? Of course not. But they are a critical step in building long term transformations. Microloan programs are not just jobs programs, or worse yet, mechanisms for the redistribution of wealth from one country to another. Instead, they are creating a cultural seedbed for economic freedom and independence.

While I can agree with the good intentions of Professor Cornwall's philosophy, I am also wary of the overly optimistic outlook from the more business oriented perspective. The New Yorker article that Professor Cornwall takes issue with is based on the libertarian Marginal Revolution post above. Professor Cornwall may say cynical but Professor Cowen is likely to say realistic.

So far I have covered economic principles and overly optimistic predictions. The question of human greed will be looked at more closely in a subsequent post.