Tuesday, January 16, 2007

More on Systemic Need

I believe that all peoples and societies everywhere have the capacity to excel and thrive when it comes to generating economic value. Stated negatively I don’t believe that there are some groups of people who lack individuals with the innate talents needed to generate wealth as society as a whole. That is, under developed countries have just as many people per capita with the talents and aptitudes needed do drive economic success as developed countries.

For example some of the human aptitudes for affecting economic growth are leadership, the ability to organize, analyzing, working well with people, and being competitive. There are of course many others. If you took a random selection of say 1,000 people from the U. S., another set of 1,000 from Laos, another from Nigeria, and another from El Salvador you would find that roughly the same percentage of people in each group has strong leadership aptitude, and roughly the same percentage of people in each group has an aptitude for organizational skills, and so forth.

This thought just reiterates that for most people in underdeveloped countries the problem is not with the individuals in the society but rather how the society is organized. It is not set up to leverage the talents innate in the given society. If we want to help people in these situations we don’t need to send them aid (the solution for acute aid). Rather, it makes more sense to assist in fixing the system. So, the society does a better job of leveraging the innate aggregate talents of its society.

One might propose many approaches to changing the system from military coups and interventions to install new governments to various macro economic policy changes.
I would like to suggest one a little less radical but empowering. In developed countries most people have easy access to credit for things like home mortgages, school loans, and the financing of business ventures. Traditionally in most developing countries poor people have do not have this same access to credit and when they do it is at exorbitant interest rates from loan sharks. Micro Credit is a means to provide very poor people with small loans they can use to expand their small business ventures and improve their lives.


Aaron said...


If you use the search engine and enter in the word Yunus. You'll find some articles about a guy name Muhammed Yunus who won the Nobel prize in regards to Microcredit loans to third world countries.

There of course is some controversy:

John said...

Hi Aaron. Thanks for being the inaugural post on my blog. I am familiar with Muhammed Yunus and may post something on him some day.
As far as "problems" with Microcredit I have some thoughts.
Regarding the squabbles between Telenor and Yunus. Two powerful business partners fighting with each other. So, whats new. I think the fact that it is a business and not a charity is a good thing. Because both parties benefit (the lender (because of interest received) and the borrower (use of capital to expand the business)) it makes it sustainable rather than a quick fix. The loans are repaid so the money gets reused over and over again.
I have heard of 2 problems in the field and these do not appear to be wide spread. However, with more than 100 million loans to date world wide there are bound to be a couple problems.
First you do occasionally hear about excessive interest rates. I would say anything over 50% per anum is probably excessive (assuming reasonable inflation rates). 15 to 35% is typical. You have to remember it is relatively expensive to administer these loans. It's not like a loan officer in the US where each loan is for $10,000. At $300 a loan it takes a lot more interest to cover the salary of the loan officer. Also, the loan officer has to work a little harder. He/she is going out into the field to make these loans not sitting behind a desk waiting for people to come with him.
Second, I have heard that collection practices in some places have been excessive. More of the cousin Guido approach. This is of course wrong.
In areas where these abuses have occurred I understand that the governments are trying to implement regulations. One fear is that if they put too low a cap on interest rates it will drive away the Micro Credit business because they can't cover the costs.

Aaron said...

I agree that it should be a business. I thought it was interesting that people who are all gung ho on charity will think that a business that has financial pursuits but somehow has the appearance of a charity is only an evil "money making scheme" devoid of a positive effect.

15-35 seems high to me. We've got it easy here in the U.S.

Other expenses are lower when your creating a business in a third world country. i.e. labor, paying for air conditioning, the tax deductible 4x4....