May 25, 2005
THINK SMALL:
Put Your Faith in Microfinance (Jacques Attali, May 2005, Foreign Policy)
FREE ADVICE FOR PAUL WOLFOWITZPosted by Orrin Judd at May 25, 2005 9:09 AM
On June 1, Paul Wolfowitz will become the next head of the World Bank. His mission: to end global poverty. The trouble is, few agree on how to go about it. So FOREIGN POLICY asked five of the world’s leading development experts to offer Wolfowitz some free advice on getting the job done.* Put Growth Ahead of Aid by Theodore Moran
* Put the Bank to the Test by Esther Duflo
* Put Your Faith in Microfinance by Jacques Attali
* Put Borrowers on Notice by Devesh Kapur
* Put the Brand First by Klaus SchwabPut Your Faith in Microfinance
Clearly recognized today as the only efficient way to fight poverty, microfinancing provides poor people with badly needed access to credit. Typically, poor people have no property and, hence, no collateral. Without collateral, they have no means to secure a loan. So the entrepreneurial ability and ambition of poor people is blocked by their lack of access to credit. Microfinancing unleashes that entrepreneurial ambition by offering small loans—normally in the hundreds of dollars—as start-up capital at normal interest rates. The global repayment rate for microfinance loans is about 98 percent. These loans allow families to get out of poverty, send children to school, and finance healthcare costs. They also help poor people garner the resources necessary to defend their freedom and democratic rights. [...]
Microfinancing is the most efficient and least expensive instrument for fighting poverty that Wolfowitz and the bank have at their disposal. By providing poor people with a necessary instrument of entrepreneurship, microfinancing is also the best way to foster free markets and democracy in the regions where that system is needed most.
Attali is so right it hurts. The situation surrounding microfinance are (at least) two. First, lenders and borrowers, and the institutions they represent, prefer big loans not for economic reasons but for preserving their positions of power. They will not easily give this up. Second, microloans were, in the past, costly to administer and therefore gave a lower return. However, advances in loan administration software, data management, and the ubiquity of electronic connectivity this is no longer so. The context for lending is demassifying and the economics (profit) favors microloans. Funny how the devolution of power permiates everything, isn't it?
Posted by: Luciferous at May 25, 2005 9:44 AMIt's very funny to see Attali pushing something which is dependent for its success on low overheads. The last time he got his hands on a development budget he went the other way entirely.
It's also funny to see microloans being pushed because "poor people have no property and, hence, no collateral". As Hernando de Soto has shown, they typically do have property, which is worth in the aggregate far more than the aid their rulers get, or any likely flows of "microloans" - they just can't register it so as to make it usable as collateral. Fail to recognize and do something about this, and all the microloans in the world will just go down the same rathole where the aid went.
Posted by: ZF at May 25, 2005 10:14 AM