Handout: Microloans and Macromagic

With all the glitz and glamour (by normal economic standards, at any rate) surrounding microloans, an article by Jame Surowiecki of the New Yorker serves to temper the hype. The excessive publicity is driving up the availability of funds for microloans:

This vogue has translated into a flood of real dollars: institutional and individual investments in microfinance more than doubled between 2004 and 2006, to $4.4 billion, and the total volume of loans made has risen to $25 billion, according to Deutsche Bank. [link]

But more money doesn’t always equate with better usage of it. Or, more specifically, even though a large chunk of it might even be going into good causes, it doesn’t mean that it’s helping the country as a whole, from a macroeconomic perspective. As Surowiecki says:

Microloans are often used to “smooth consumption”—tiding a borrower over in times of crisis. They’re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees.

But although long-term, the child’s education contributes to economic growth, the microloan does not do anything to stimulate investment or create new jobs. The assumption that every microloan is used to fund some kind of enterprise, and that every borrower is an entrepreneur is false, he says. In fact:

…in any successful economy most people aren’t entrepreneurs—they make a living by working for someone else. Just fourteen per cent of Americans, for instance, are running (or trying to run) their own business. That percentage is much higher in developing countries—in Peru, it’s almost forty per cent. That’s not because Peruvians are more entrepreneurial. It’s because they don’t have other options.

This might be the case in Peru, but certainly in India there are tremendous bureaucratic hurdles to start a new business. This, along with the other obstacles such as competing with the bigwig corporations (international and local), is a pretty big disincentive to start your own business. Although, I am sure this is changing now (don’t have any data on this), but not nearly fast enough, (as the Economist just said last week).

As Surowiecki says, the microloans fund the poor and the rural areas of the world – the little guys. But it’s the middle guy that needs the most help. And fortunately, this is changing (Google.org, the Soros Economic Development Fund, and the Omidyar Network are setting up a firm in India that will invest only in small-to-medium businesses) , but unfortunately, it does not have as much of the hype and publicity surrounding microloans.

Be Sociable, Share!

If you enjoyed this post, make sure you subscribe to my RSS feed! You can also follow me on Twitter here.

Leave a Reply