Reuters reporter Felix Salmon responds to CGD senior fellow David Roodman comments on a debate he had with Matthew Bishop on Microfinance.
From the Article:
David Roodman has some great comments on the video debate between me and Matthew Bishop.
He asks whether I’m “completely against the idea of pocketing a profit from serving the poor” — of course not. In principle, I’m all in favor of it. Matthew’s point at the end of the video is a very good one — if we want to get education or water or healthcare to the world’s poor, we’re going to have much more luck if we do so with a profit motive than if we rely on overstretched and underfunded governments to do it.
But as Roodman goes on to say later in his post, credit is special. Loans come with onerous future obligations in the way that water and education and healthcare do not. All borrowers have to pay back more money than they borrowed, which means that they come out behind on the deal — unless they can put the money to good productive use. Sometimes they can; a lot of the time they can’t.
I’m not saying that bankers shouldn’t profit from serving the poor; I’m just saying that the banks should be local institutions which reinvest their profits in the community. If a microfinance institution is set up so that a substantial flow of money is going out of poor neighborhoods and into the pockets of millionaires, there’s something wrong, and I’m going to be very skeptical that the poor are actually being helped at all. As Roodman says, giving poor people capital and asking them to pay it back with interest does not, in and of itself, help reduce poverty. Loans can help at the margin, especially when they’re used to fund small businesses, rather than their more common use of consumption smoothing. But the cheaper the loans are, the more effective they are — and microfinance loans are generally very expensive. Credit did help to build a lot of western democracies, but it was never remotely as expensive as the loans we’re seeing in places like Mexico.