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Global Crisis/Innovation Blog

Micro-Finance: the “Atomic Energy” Syndrome Returns

By Shlomo Maital

        A BBC report notes that India’s huge microfinance industry faces collapse, as the borrowers in an entire large state, Andrha Pradesh, struggle to repay their loans. In Bangla Desh, where micdrofinance was first invented by Mohammed Yunus,  the government has slapped a ceiling on interest rates for microloans: 27 %.   Ceilings (maximum rates) tend to become also minimum rates. And how many strong businesses, like Microsoft, could afford to pay 27 per cent on their debt?  

  What went wrong?

    It is the atomic energy syndrome.  Splitting the atom made possible an enormous source of energy for peacetime purposes.  Heat from nuclear fission (and one day, from nuclear fusion) makes steam, that turns turbines, that generates electricity.  But splitting the atom also makes it possible to create nuclear weapons,  thousands of them, that threaten humanity.  Like almost all technologies, splitting the atom is both a fantastic boon and an enormous evil.  It all depends on how we use it.

  Microfinance has been, expectedly, misused. By allowing the private sector to run amok in this area, with the aim of making profit, it has made microfinance into a micro-example of what the village lenders did earlier – charge usorious exorbitant interest rates that the poor cannot repay, then take away all their possessions when they fail to pay it – at times, leading to suicide. 

     Some industries are simply not suited to for-profit rapacious capitalism. Health care is one.  Microfinance is another.  Why do free-market advocates repeatedly grab control of industries that need to be provided as public goods, and turn them into private bads? 

     Dr. Kazi Akhmed, a Bangla Deshi expert, notes that microfinance loans have to be repaid starting one week from receipt of the loan, in weekly installments. How many businesses can make profit within one week, in order to repay the loan?  Even philanthropic microfinance companies charge 12-15 percent interest – the rate of interest that the government of Ireland is struggling to pay.  How many poor people taking microfinance loans have the business expertise to know how to run businesses, especially in hard times, during the global crisis?  Lending the poor money is not enough; they need to learn about basic rules of business as well. Why is this not provided together with the money? 

     Collapse of microfinance will mirror the collapse of investment banks – only it will be the poor who pay the price, not the rich.  It could, and should, be prevented.   



Global Crisis Blog

Will America Bounce Back? And How Will We Know?

By Shlomo Maital

   America is still the world’s largest economy, more than twice as big as #2, China. But America no longer can play its traditional role – providing huge amounts of demand for other countries, to pull the world out of global recession.  America’s wagon itself is stuck in the mud and badly needs help. 

   President Obama’s former Council of Economic Advisors Chair Christina Romer,  writing in the Global New York Times (Int. Herald Tribune), gives us a clue to the vital question: Can America bounce back (again)?  How will we know when the ‘bounce’ begins?

   “In a paper I wrote many years ago,” she notes, “I found that …the stock market crash in 1929 did not destroy a particularly large amount of wealth or make people highly pessimistic.  Rather, it made companies and consumers very unsure about future income, and so led them to stop spending as they waited for more information.” 

   This is a perfect description of Japan, 1990-2010, where for two decades uncertainty shrouds everyone, extinguishing both consumer demand and business investment. Much of the uncertainty comes from incompetent, unstable political leadership and leaders who have no vision whatsoever, nor provide any hope to ordinary people.

    And it is a perfect description of the U.S., 2008-2010, where political deadlock between Republicans and Democrats, vengeance-driven Republicans who would rather sink the U.S. economy to defeat Obama in 2012 than help the economy and, heaven forbid, re-elect him (viz. Senator Mitch McConnell), and a weak and weakened Obama who has been unable to get control of the old-boy-club in Washington, have conspired to mount an enormous question mark over the lives of ordinary Americans.

    America will bounce back. Out of this chaos will emerge a leader, doubtless a rather unlikely one, who speaks words ordinary people understand and who shows them the way forward, involving present sacrifice for future gain.  Don’t rely on economists or number-crunching to guide you. This crisis is NOT about numbers.  It is not about interest-rate basis points or GDP growth points, it is about hope. People work hard, start businesses, invest, even spend, when they have hope. 

    In Franklin Delano Roosevelt’s First Inaugural Address, in Jan. 1933, the new U.S. President, who inherited a mess far worse than that Obama did, said, “the only thing we have to fear is fear itself.”   That captures the problem in a nutshell.  Once ordinary Americans overcome their fear of the future, and are given good reasons to overcome it, once their fear turns into hope, the crisis will be over and America will bounce back, even though the road will be long and hard.     

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
December 2010
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