Extremely Disappointed in Cato

I am extremely disappointed in the recent Cato Daily Podcast episode called Microfinance in Hindsight (featuring Thomas Dichter). See, I tend to greatly enjoy the Cato podcasts and, when I first saw that this was the title I was really excited. For one thing, I think microfinancing (the idea of making loans of $75 to maybe $300 to people living in poverty rather than aid or something else) is an exciting idea, and for another thing, my brother is going to be doing the program this summer in Africa working on just that.

But when I listened to the podcast, Thomas Dichter was extremly pessimistic on the subject of microfinancing: he said it didn't work. It didn't work!?! The things I've heard of, and admittedly, that's mostly been the initial pilot programs, have sounded quite successful: the loan poor people small amounts of money, and the borrowers use that money to start businesses or improve their homes, and that there is an extremely high rate of repayment, in fact, at a higher rate than other banks get. So basically, extremely poor people who might not otherwise be able to get a loan, get a loan, improve their lives, and then pay it back such that the banks make money as well. I'm not really seeing the down side.

But the speaker claimed that this, improving the lives of the poor, while running to profit-making enterprise, was not the point. What microfinancing was supposed to be doing according to him, was stopping poverty. He pointed out that these countries where there they're trying to use microfinancing have many poor people. And that some of the reasons they have so many poor people are a not much of a rule of law, bad governments, bad government policies etc., and that, under these circumstances, microfinancing it did nothing to lessen the rate of poverty.

Well, no sh-t Sherlock.

When a society has a bad government, it's really nice when you can make some people's lives better, but it's ludicrous to think that lending money to some, presumably small, percentage of the population of the country will be enough to overcome all the problems that emanate from having a bad government. He also complained that people use the money to pay for things like medicine for their children were fixing up their houses (which he condescendingly called shelters). He then proceeded to suggest that these people would be better off if, in addition to getting their loan guide they would get education to show them how properly to use the loan. Again, very condescending, but more importantly, it seems very misinformed. One of the presumptions behind microfinancing (or, indeed, all of free-market economics), is that individuals know best what is most useful for them. I hardly think some kind of one-size-fits-all quick education plan is going to be particularly effective in improving people's lives. For one thing, any plan like that which removes the power from the individuals misses out on the fact that individuals tend to see what that individual needs as well as what are good of ways to investing in their own communities.

Now, going back to his complaints that people were using the money for her medicine in or or improving their houses, what do other people, for example, me, use their money for? Uh, mostly consumption. Basically, all of my money is used for me to consume in one way or another. Even my investments are just a form of consumption, because they are really awake for me to defray my consumption and improve my future ability to consume. I don't invest because "it's good for society," I only invest because I expect to get something from it. Selfish? Sure. But I'm really okay with that.

While he was complaining that people were daring to use their borrowed money for things they wanted, he also pointed out that they didn't seem to be trying to save money by putting it in banks. He then kindly pointed out that a possible reason for this is that many banks in these areas are actually not very safe. And someone who puts their money in one of these banks faces the very real possibility of not being able to get it out later. I was shocked that this was his idea of a complaint. I mean, if your money isn't safe in a bank and then you choose not to put it in a bank. Sounds to me like you're doing, the only intelligent thing under the circumstances. Why on earth would he suggest that we need to teach people to do something that's actually a really bad idea? And not only did he want people to follow this moronic suggestion, he acted in an extremely condescending manner, as if they were too stupid to realize that saving money means more later; actually, they are being quite smart. Furthermore, this is a classic example of the market working: when untrustworthy people ask others to invest in them, they will be by and large unsuccessful at getting that money.

Now, the speaker did make a few reasonable complaints: people get themselves into a cycle of borrowing from one microfinancing company to pay off another or else they borrow, spend it all, then try to get money from their social network to pay back the loan. This is not good.

Of course, as compared to borrowers from a successful country (e.g. Americans), it's not exactly unusual either. People do stupid or unthinking things all the time; not even economists are barred from such mistakes. But just because some people who use a program engage in the same foolish behaviors that others from other programs have, is no reason to denigrate the whole program.