My micro-credit essay with Karol Boudreaux

From the Wilson Quarterly of this January, here is one excerpt:

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.

The piece attempts to redress many myths of micro-credit.  For instance it is often claimed that micro-credit doesn’t involve collateral, but that isn’t quite true.  The borrowing is done in small groups, and if you don’t pay your share the neighbors come and take away your TV set.  In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.

My favorite part of the piece is this:

Sometimes microcredit leads to more savings rather than more debt. That sounds paradoxical, but borrowing in one asset can be a path toward (more efficient) saving in other ­assets.

…Westerners typically save in the form of money or ­money-­denominated assets such as stocks and bonds. But in poor communities, money is often an ineffective medium for savings; if you want to know how much net saving is going on, don’t look at money. Banks may be a ­day­long bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on ­hand.

Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable ­meat or simply eaten. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.

In other words, read Keynes’s chapter 17, go long on animals (liquidity premium exceeds carrying costs), go short on money (carrying costs exceed liquidity premium, at least in poor countries), and increase your future expected net wealth.


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