MICRO-WELFARE FOR MACRO-EFFICIENCY
Whether from deficient signaling, institutional myopia, or congested interests, no government has ever succeeded in eliminating poverty. Many have attempted and all have failed. Although elimination poses an extreme—even impossible—goal, it is not unreasonable to expect greater efficiency. When considering the history of welfare programs, authors Smith and Thurman question the role of governments in the war on poverty. In response, the authors posit inefficiency as natural: “That’s because poverty is about money” (Smith & Thurman, 2007). Furthermore, “Who knows how to handle money? Business people. And the more successful they are in business, the more creative they can be in philanthropy” (Smith & Thurman, 2007). Among the many forces maintaining third-world poverty, one constant is the absence of capital funds. Without available capital, market failure is self perpetuating; people remain dependent on their respective governments, with no chance of growing their businesses. One recent trend promises hope to these stagnate groups. Microfinancing, while still developing, offers a market mechanism for the allocation of resources to where they will achieve the greatest public good. While providing capital to individuals, this system encourages interpersonal efficiency through cost/benefit analysis and provides natural incentive through long-range planning.
Microfinancing describes the practice of offering financial services, such as microcredit, microsavings, or microinsurance to the lowest socio-economic bracket. While allowing poor people to access usable sums of money, this expands their options and reduces their risks. In terms of a public good, microfinancing provides a Lindahl equilibrium in that individuals pay for the provision of the good according to their marginal willingness to pay. While allowing for diverse environments, microfinancing requires knowledge of demand from the borrower; the organization or individual must weigh demand before assessing a rate of return. In contrast with classical conceptions of voluntary provision, this good is incentive compatible; microcredit produces a system wherein participants are best served through honest interchange. Although security for lenders is largely unstable, allowing for temporary free-riders, microcredit provides a mechanism for weeding the unprofitable from the profitable. The impetus for aiding such impoverished classes has arisen from the awareness, among various multinational companies and global organizations, that they need new markets as wealthier classes reach saturation point. As stated by Smith and Thurman, “success in the financial world [can] be applied to helping the economies of poor countries anywhere in the world” (Smith & Thurman, 2007).
Philanthropic welfare has been a staple within government programs and domestic budgets for years. For example, “By the time you put together all of the donations, dues, fees, and government grants, the total budget for U.S. nonprofits tops $900 billion a year. These nonprofit groups employ more people than the real estate, insurance, and finance industries combined” (Smith & Thurman, 2007). While suggesting the need for greater scrutiny, the authors note that money is ignorantly thrown at problems even when there are no lasting improvements. Unintended consequences arise when, due to misplaced resources, these organizations further perpetuate the shortages they intended to eradicate. Rather than independent growth, they propagate humanitarian dependency. Microfinancing, in contrast, seeks to impute liability and incentive, while encouraging greater self-sufficiency.
Initiated by humanitarian organizations like Opportunity International, World Vision, and USAID, microfinancing later became an investment mechanism for the greater business world. Recently gaining attention from some of the world’s largest companies, CNBC reports a few: “From Google to Yahoo! and YouTube, Sequoia Capital provided venture capital funding to some of the biggest cutting-edge talent in recent memory. Now the private equity fund is making a big bet on microlending, with its $11.5 million investment in India's SKS Microfinance” (CNBC, 2007). Commercial banks like Citigroup, Deutsche Bank, HSBC and others are also entering the market. The growing interest of global players demonstrates both achieved success and future potential for microfinancing. “In the world of philanthropy, as in the world of business, the terms are critical to the success of the transaction” (Smith & Thurman, 2007). Welfare should promote sustained growth, cost should predicate benefit, and provision should mirror demand. As each of these principles is inherent to good business, it seems the authors are correct in desiring a more personalized system.
Microfinancing creates a structure in which this is possible; in sum, it produces micro-efficiency for the macro-benefit. Rather than free money, microfinancing offers loans, credit potential, and banking services to individuals who have never experienced such luxuries. With capital potential and “sweat equity” poor people can now change their lives. This system precludes government despotism in that loans are too small to be of any temptation, and security is insured through microsavings. While accompanied by clear and measurable results, time will surely reveal the facility of this new welfare mechanism.
Microfinancing describes the practice of offering financial services, such as microcredit, microsavings, or microinsurance to the lowest socio-economic bracket. While allowing poor people to access usable sums of money, this expands their options and reduces their risks. In terms of a public good, microfinancing provides a Lindahl equilibrium in that individuals pay for the provision of the good according to their marginal willingness to pay. While allowing for diverse environments, microfinancing requires knowledge of demand from the borrower; the organization or individual must weigh demand before assessing a rate of return. In contrast with classical conceptions of voluntary provision, this good is incentive compatible; microcredit produces a system wherein participants are best served through honest interchange. Although security for lenders is largely unstable, allowing for temporary free-riders, microcredit provides a mechanism for weeding the unprofitable from the profitable. The impetus for aiding such impoverished classes has arisen from the awareness, among various multinational companies and global organizations, that they need new markets as wealthier classes reach saturation point. As stated by Smith and Thurman, “success in the financial world [can] be applied to helping the economies of poor countries anywhere in the world” (Smith & Thurman, 2007).
Philanthropic welfare has been a staple within government programs and domestic budgets for years. For example, “By the time you put together all of the donations, dues, fees, and government grants, the total budget for U.S. nonprofits tops $900 billion a year. These nonprofit groups employ more people than the real estate, insurance, and finance industries combined” (Smith & Thurman, 2007). While suggesting the need for greater scrutiny, the authors note that money is ignorantly thrown at problems even when there are no lasting improvements. Unintended consequences arise when, due to misplaced resources, these organizations further perpetuate the shortages they intended to eradicate. Rather than independent growth, they propagate humanitarian dependency. Microfinancing, in contrast, seeks to impute liability and incentive, while encouraging greater self-sufficiency.
Initiated by humanitarian organizations like Opportunity International, World Vision, and USAID, microfinancing later became an investment mechanism for the greater business world. Recently gaining attention from some of the world’s largest companies, CNBC reports a few: “From Google to Yahoo! and YouTube, Sequoia Capital provided venture capital funding to some of the biggest cutting-edge talent in recent memory. Now the private equity fund is making a big bet on microlending, with its $11.5 million investment in India's SKS Microfinance” (CNBC, 2007). Commercial banks like Citigroup, Deutsche Bank, HSBC and others are also entering the market. The growing interest of global players demonstrates both achieved success and future potential for microfinancing. “In the world of philanthropy, as in the world of business, the terms are critical to the success of the transaction” (Smith & Thurman, 2007). Welfare should promote sustained growth, cost should predicate benefit, and provision should mirror demand. As each of these principles is inherent to good business, it seems the authors are correct in desiring a more personalized system.
Microfinancing creates a structure in which this is possible; in sum, it produces micro-efficiency for the macro-benefit. Rather than free money, microfinancing offers loans, credit potential, and banking services to individuals who have never experienced such luxuries. With capital potential and “sweat equity” poor people can now change their lives. This system precludes government despotism in that loans are too small to be of any temptation, and security is insured through microsavings. While accompanied by clear and measurable results, time will surely reveal the facility of this new welfare mechanism.
posted by aesthetic realist at 6:46 PM
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