Can Micro-Finance Save The World?

College students are indoctrinated with a sense of guilt for the US’s success, yet it seems they rarely get a sense of what really makes the US exceptional. With a touch of youthful innocence, two college students are producing a documentary based on their experience living in extreme poverty (i.e. subsisting on $1 per day) in the backwaters of Guatemala. Blessedly, their message is not that of Marxism, which is sweeping the region. Instead Mr. Temple and Mr. Ingrasci are students of development finance and evangelists for micro-finance.

The students are members of the Whole Planet Foundation, which is also supporting their film. The foundation is a micro-finance provider with close ties to Whole Foods grocery stores (readers may be surprised to learn that Whole Foods’s co-founder and co-CEO is a free market libertarian). They posit that many people yearn to be entrepreneurs but lack even modest seed money to pursue their dreams. Micro-finance loans, as pioneered by Nobel Peace Prize Laureate Muhammad Yunus, can enable small businesses that are unattractive to anyone with even modest success and far too small to justify the origination costs of a traditional loan. Still, such small loans can lift people out of extreme poverty when hard work needs even the slightest leverage to be more productive.

Micro-finance’s anecdotal successes suggest that simply dropping dollar bills over an impoverished area is superior to the billions in US foreign aid that never seems to reach the poor. Still, micro-finance is unlikely to build great nations from the mud. Great nations do great things that micro-finance cannot accomplish. Nearly every great nation has its own auto industry, and a handful of the greatest nations have their own aircraft industries. Micro-finance may enable a family to start a small business so they can care for themselves, but the capital formation process required for a jet engine is beyond the reach of small individual loans. At some point a broader capital market must take over.

The US and nations like it are exceptionally good at the massive capital formation required to do great things. The US benefits from a classless society; despite what demagogue millionaires like Sen. John Edwards and Pres. Obama say, anyone can do anything in the US. The US benefits from Christian values like the Protestant work ethic; work and accomplishment are admired by most Americans other than college professors and community organizers. The US has strong property rights, with the rare exception of Washington’s view on GM and Fannie Mae. The US has the strongest respect for personal liberties; the First and Second Amendments remain strong despite decades of attacks. These are the pillars of a society where micro-loans are only needed as educational tools for Junior Achievement.

Micro-finance alone will not grant Guatemala the advantages of the US. As the film-making students know, economic growth is correlated with investment in human capital (i.e. education), infrastructure (i.e. government spending), and private capital formation. Only governments and private cultures that resemble the US’s ultimately prosper; no amount of aid has ever made a dysfunctional nation prosperous. Still cheers to these students who chose to live in the poorest part of a nation 1/10th as prosperous as the US, who understand that life is usually brutish and unfair, yet want to uplift the poor with some of the tools of US capitalism.

2 thoughts on “Can Micro-Finance Save The World?

  1. I think the work ethic is beyond Christian values – I have many friends of different faiths, both Christian, Jewish and others who have tremendous work ethic as well. Great article.

  2. One does not have to be Christian to hold values pioneered by Judeo-Christian culture. Indeed, the US is probably the most Christian nation, yet most Americans don’t even know it. The values that come from the Judeo-Christian tradition like individualism, literacy, property rights, and equal rights for women are so ubiquitous most Americans take them for granted. However, go to a Muslim nation and their absence is rather obvious.

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