2005/03/13 - José Carlos Rodríguez - Libertad Digital

Microcredits, Regulations And Development

But as valuable as this advance in the financial system may be, the microcredit could end up building a house from the roof down. The key is not ensuring a small amount of money gets to a family in Calcutta, but to turning this money into capital.

Ever since Adam Smith posed the problem in the title of his influential work, the wealth of nations has been a constant worry for economists and reformist of every kind. This concern took on a new life after World War II, perhaps because of the rise of a real social conscience or, amazingly, because capitalism was accused of creating misery in those countries where it had not taken root. Interest for poverty and development has only grown over the years. In one guise it is a legitimate interest in the fate of millions of people. In another, it is but an excuse to accuse capitalism of causing all the world’s evils –although always far away in those places where it is not present. In cases like Ethiopia, capitalism was even charged with the famines caused by socialism. The search for the keys to development, undertaken in the most prestigious Western universities, managed to invert Adam Smith’s research agenda and instead of wealth, they looked for the reasons for poverty. This perspective could not be more wrong. Poverty is the natural condition of man. We come into the world with nothing and survive on the wealth our ancestors were able to generate or accumulate.    

Almost everything has been tried to alleviate poverty in the most dispossessed societies, from protectionism to central planning and massive force sterilization. The last is a new example of how reactionary and racist the left can become when it wants to. Far removed from the socialists’ proposals, in the second half of the 1970s people began to talk about a new tool to fight poverty and aid in economic and social development: the microcredit. The idea is simple: give credit to the poor, but ensure their interest in moving up and out starting a small business, making improvements to their house, or other such ends like education. This seems reasonable. It is good to promote individual effort and responsibility, and personal and societal progress. One cannot help but recall the proverb about fishing or teaching how to fish.  

But as valuable as this advance in the financial system may be, the microcredit could end up building a house from the roof down. The key is not ensuring a small amount of money gets to a family in Calcutta, but to turning this money into capital. For this, property rights must be defined and protected. As Jose Ignacio del Castillo brilliantly explained, “without private property, without markets and prices, without division of labor and without businesses, there simply is no capital. There might be other things: machines, buildings, technology, workers, but not the soul that makes everything work”. 300 euros aren’t worth much to a micro-company if it costs five times as much to register the company; if state regulations and interventions keep it from functioning properly. A recent study in the Phillipines shows, in the author’s words, if the microcredit has adequately served as aid for basic necessities, it has not proved a useful instrument for developing this country, “microfinancing does not attend to the true causes of poverty”. These lie in maintaining a regulated economy, asphyxiated by intervention and that does not sufficiently recognize or protect property rights: that is to say, the rights of the individual.

The World Bank, so taken with promoting public aid and state adventures of every type, recently admitted in an important study that regulations are an authentic obstacle to creating wealth. The Economist writes “In Haiti, for example, it takes 203 days to register a new company, which is 201 days longer than in Australia. In Sierra Leone, it costs 1,268% of average annual income per head, compared with nothing in Denmark” and “overall, businesses in poor countries shoulder three times the administrative costs and have to struggle through twice as many bureaucratic procedures as their counterparts in rich countries.”

This is not to say microcredits are not a valid institution, but only when the security to use them freely and in freedom is guaranteed.