The Father of Microcredit

by on May 21, 2012 at 7:04 am in Books, Economics, History | Permalink

You’ve heard how microcredit was born. In a nation long shackled by British rule and wracked by famine, a brilliant man was seized with a desire to strike a blow against the poverty all about him. Defying common sense and the skepticism of his colleagues, he began lending tiny sums out of his own pocket to poor people, which they were to invest in tiny businesses. He demanded no collateral, only the vouchsafe of the borrowers’ peers. The borrowers rewarded his faith with punctual repayment. In time, his experiment spawned a national movement that delivered millions of loans to poor men and women and broke the power of money lenders.

The hero of this story is…Jonathan Swift, author of Gulliver’s Travels.

Swift developed the main ideas of microcredit–small sums, co-signers on the loan who knew the recipient, loans to women–in the 1730s.  Although the system did not grow large in his lifetime, by the 1840s Irish microcredit institutions served a fifth of the population of Ireland.

The quote and information are from David Roodman’s excellent book Due Diligence: An Impertinent Inquiry into Microfinance. Roodman is a  remarkable scholar, equally at ease collecting information in the slums of Bangladesh as writing complex computer code, and Due Diligence is a very good book not just on microcredit but on development more generally.

(Loyal readers may recall that Tyler also noted Swift’s connection to  microcredit in a post from 2006.)

EM DC ECONOMIST May 21, 2012 at 8:03 am

He is great and all that. But in the interest of being unbiased : I hope you will not delete a link to a blog post written by one of the most respected economists at the World Bank (there are a lot more links and issues as well as at least one academic paper on this debate :

http://blogs.worldbank.org/developmenttalk/node/605

The Keystone Garter May 21, 2012 at 9:33 am

Is exactly what Yunus did, and ending the same way with mainstream commercial bank investment and future ceassation by increased administrative costs (country gets too rich too afford customer service staff for increasingly crappier entrepreneurs). Strange no one tried this on the Indian subcontinent or elsewhere between 18th century and 1980s. Need lack of war and violent crime. I dunno if Africa would’ve permitted this before AIDs, they were tribes that hated eachother lots.

Zachary May 21, 2012 at 11:57 am

I’m sure that the Socialism didn’t help Indians get credit either…

The Keystone Garter May 21, 2012 at 1:47 pm

India had socialism post-WWII? Problems I studied were their caste system, and lack of diversity of food sources. In China they’d eat anything. War with split off portions kind of defeats the whole point of breaking up country. Now, they have software and call centres and Tata cars are good investment. But pollution might be a major problem. Apparently their children are coated in a thick layer of crap in some places.

TallDave May 21, 2012 at 12:23 pm

Property rights are hard. Even leading civilizations tended not to have them until relatively recently. I was re-reading VDH’s history of Lepanto yesterday — apparently the first Islamic bank was not instituted until the mid 1800s, and even then it was formed with Western capital. The Pasha had to bring all his personal wealth with him to Lepanto in 1571, and it was all lost when those massive galleases blew apart half his galleys.

Euripides May 21, 2012 at 10:10 am

From Roodman’s bio:
“He has never taken a course in economics or statistics.”
And he only has a bachelor’s!

May want to recruit him for GMU’s PHD program–the fast track one.

Jo May 23, 2012 at 8:52 am

That fast track PhD program looks interesting.

Bill May 21, 2012 at 10:48 am

Don’t forget the micro loans to the Lillyputians.

David Roodman May 21, 2012 at 11:50 am

Thanks very much for the shout-out Alex.

For those interested in the microcredit debacle in India, I also recommend Tyler Cowen’s remarkably resonant New York Times piece from 2006, as blogged here:
http://blogs.cgdev.org/open_book/2011/02/this-just-in.php

And readers will have considerably less to learn from my book if they can get their eyeballs on Tyler’s excellent article in the Wilson Quarterly with Karol Boudreax (gated):

http://www.wilsonquarterly.com/article.cfm?aid=1087

EM DC Economist, I welcome scrutiny and commentary on the debate over replicating the Pitt & Khandker microcredit impact study. I encourage readers who follow your link to check the last comment there, from me:

http://blogs.worldbank.org/developmenttalk/the-microfinance-mystery#comment-520

Ravallion has been silent since I posted that.

EM DC ECONOMIST May 21, 2012 at 12:51 pm

I didn’t follow the story through to the end. I better appreciate your perspective after reading the stuff you linked to – though a little more humility and acceptance of the need to be more careful before casting doubt is always desirable.

David Roodman May 21, 2012 at 1:20 pm

Point taken–and it probably applies all around. Perhaps I’ve lost all objectivity, but I think you’ll find more humility here:
http://blogs.cgdev.org/open_book/2011/12/bimodality-in-the-wild-latest-on-pitt-khandker.php

than here:
http://www.pstc.brown.edu/~mp/papers/Pitt_response_to_RM.pdf

Urso May 21, 2012 at 12:15 pm

“(Loyal readers may recall that Tyler also noted Swift’s connection to microcredit in a post from 2006.)”

Looking at the comments to that post, your most loyal readers appear to be the spambots.

Nick May 22, 2012 at 12:59 pm

So basically the Irish invented micro-finance? I knew it.

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