Caplan’s got an interesting post summarizing Portfolio – a book I haven’t read. Bryan’s most interesting comment about the book:
Yes, the world’s poor are striving to better their lot. But what they really need isn’t small-scale entrepreneurship and micro-credit. It’s employment in the formal sector, and access to international credit markets. What they need, in short, is globalization. Either they need to come to us, or our institutions need to go to them.
In my experience this attention to funneling the bottom classes into the formal sector is explicitly mentioned as a primary goal of microfinance programs, but this leaves a few very important clarifying questions:
1. The typical Austro-Virginian political economy critique: do micro-finance programs have the knowledge or the incentives to accomplish this goal?
2. Do we (economists skeptical of microfinance) or they (microfinance proponents) have a good accounting of the fundamental causes for why these lower class populations are stuck in the illegitimate – dare one say “black market” – sector?
3. Is there a full accounting of all or at least most of the obstacles that may arise with the application of new micro-finance policies?
I share Caplan’s general point mostly because I think the answers to number one aren’t good because most of the support for microfinance programs are coming from the public or quasi public sectors. I think the answer to number two is a mild yes for we but a resounding no for they. And the response to three is dependent on the answers for one and two.
I’m glad someone here brings this issue up. The last time I heard about microfinance was Walter Block’s speech at ASC. In my opinion, he did a very poor job: he didn’t address almost any issue about microfinance itself, only gave a libertarian-dogmatic talk on what libertarians SHOULD think of microfinance according to Yunus’ political views and other stuff that had very little to do with microfinance.
But anyway, I don’t see microfinance as the main solution to poverty whatsoever. Unless barriers to entrepeneurship are not removed, contracts are not enforced, private property rights are not respected (i.e. what Acemoglu and Johnson call ‘property rights institutions’), econ development is very difficult.
But microfinance might help a bit. If you can help financing a woman to set up some kind of business in Africa and she succeeds, that may have very positive consequences and spillovers. There are projects that try to do this such as Kiva or Kickstart. These steps may also be useful to advance and create demand for an institucional change that is required for sustained development.
Best regards
I may be nieve in saying this, but I think that microfinance has some potential to be a driving force in developing the kinds of institutions Caplan talks about … if only the private sector had more incentives to get involved.
Many microfinance groups (one in particular I’m thinking of in northern Honduras called the Adelante Foundation) provides women in the program with educational tools/job skill training that they lack for obtaining otherwise formal market employment. Perhaps if those elements of microfinance programs were capitalized on by the groups running the programs, they would generate incentives for the private sector to get more involved…?
And I think the public sector would admit the microfinance programs are not as beneficial as they could be. Perhaps this is an opportunity development economists ought to invest more time into? Talk about institutions and private property rights doesn’t make any sense to the politically and economically repressed who ultimately have to demand their existence. Give people a sense of empowerment they can understand – not entitlement – and it’s at least a move in the right direction.