Microloans -- An alternative to social welfare programs

In 1848, a few years after Dicken’s The Christmas Carol a German, Friedrich Wilhelm Raiffeisen, designed a system now known as microfinance which successfully provided capital means to German farmers. In the modern age, the economist Dr. Muhammad Yunus took this concept into India using it to the advantage of the poor and winning himself a Nobel Peace Prize in a more deserving manner than Al Goreacle. Microfinance and microcredit is a simple concept where organizations or people lend poor entrepreneurs usually in the Third World small loans which enable them to develop employment opportunties. Unfortunately the economic evidence is still out regarding microfinance’s sum total benefits, but it does appear to be an effective method for enabling people to create sustainable economies.

Indeed not only is it is well established that economic freedom increases economic development, Dr. Ross Levine has demonstrated that the ease of availablity of financing is another positive factor, as reviewed in this paper. That microloans are profitable to both parties is evident by the fact that major banking corporations including HSBC have now entered that market.

So along with the benefit that microloans are not evil subsidies that simply cause more harm than good, they have the benefit of potentially causing economic growth by working with the people who know what they need for their success.

Source: Wise Man's Charity

As a firm believer in free-markets -- and also recognizing that poverty is not going away, and not necessarily a result of a character flaw -- I've spent a lot of time thinking about the best way to deal with the poverty problem. Obviously, a lot of clever people are too poor to start that business that they dreamed up; and a lot of children never the chance to grow, intellectually, because they're trapped in a third-world nation with no opportunity to gain a world-class education. These are the big problems in social policy, and they won't be solved any time soon. In my studies, the one approach that seems to do more good than harm is the microloan program.

The idea is that by lending a relatively small amount of money to somebody who's very clever -- and very poor -- you can make a tremendous difference in their life. They will have opportunities that they otherwise wouldn't have, and you'll be paid back, in full. Microloans have been granted in underdeveloped countries, for the most part; but, they're starting to catch on in the USA as well. Having spent a lot of time talking to America's urban poor, I'm always impressed by the volume of good ideas that these people come up with (hey, if you are wanting, and you no job, then you have a lot of time to think of things people would want), but can't conceivably bring to fruition.

If you want to learn more about the process, and if you are interested in granting microloans yourself, a great source is Kiva.org. For more general information on microcredit, see Wikipedia's microcredit entry.

In the past, I've suggested similar programs in the USA, as an alternative to welfare. The would-be recipients think that it's a spectacular idea. Unfortunately, a lot of political types don't like it because...well, it's an alternative to welfare.

[edit on 10-5-2009 by theWCH]