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  • A Free Market Solution to Helping the World’s Poor

    A featured op-ed in The Wall Street Journal last week documented the recent, surprising successes of Bangladesh. Henry Kissinger dubbed it a “basket-case” at its inception. It has little economic freedom, and many in the international community saw little hope for it, but it has made some large achievements in recent years. The economy is on an upward spiral, birth rates are down, and commendable progress has been made in tackling the influence of Islamist extremism in a Muslim majority country.

    The current government has helped with these upswings, but there is a stronger and more influential force in this equation: the effect of microfinance. First conceived of as a tool to alleviate the widespread poverty plaguing the country, it is a process in which small loans are issued to people, mainly women, with little or no collateral which they are obligated to pay back with interest.

    Microfinance has been a presence in Bangladesh almost as long as the country has existed. Pioneers of the process—most notably Fazle Hasan Abed and Mohammed Yunus, founders of BRAC and the Nobel Peace Prize–winning Grameen Bank—made their start lending to only a handful of women in remote villages. Today, microfinance’s reach extends through the entire country.

    Many on the left have hopped on the bandwagon, which is welcome but still a bit surprising, given that microfinance resonates so perfectly with conservative thinking. Unlike most foreign aid—a temporary and oftentimes unsustainable solution that can leave its recipients ultimately worse off—microfinance is a market-based solution. Borrowers gain access to capital not available before and are able to generate their own sources of revenue using individual skills and abilities. They become entrepreneurs.

    Microfinance would help a village once home to 10 women who owned nothing become a village with 10 women who have money to put back into the economy—and 10 new businesses to boot. The woman who made money selling milk from the cow she bought with her loan could now buy food at the small store another woman opened up with her loan and shoes for her children from a shop that struggled before 10 extra people had money to buy the owner’s goods. Every time a woman pays back her loan, she can receive another slightly larger loan to expand her business. This struggling village would now be a growing micro-economy.

    What happened in one village 30 years ago is affecting thousands of villages and towns throughout the country. Trade across communities is expanding. Millions more children can get an education instead of working. Birth rates have decreased for multiple reasons related to improved economic well-being.

    Microfinance likely plays at least a small role in preventing the spread of Islamist extremism. In the absence of economic opportunity, extremists can more easily recruit young men on the brink of poverty and struggling to survive with money, a sense of camaraderie, and a scapegoat on which they can blame their troubles. The economic benefits brought with microfinance can help prevent such a situation.

    Bangladesh would not be where it is today without microfinance. For over 30 years it has endured and advanced throughout the country, leaving behind positive results. Adam Smith argued that nations with institutions in place that encourage entrepreneurship and savings will experience opulence and peace. In nations with little economic freedom, microfinance fills the gap in providing these institutions, and like what is happening in Bangladesh, they will eventually experience the beginnings of peace and prosperity.

    Posted in International [slideshow_deploy]

    4 Responses to A Free Market Solution to Helping the World’s Poor

    1. Billie says:

      Common sense and complying leadership. The people make the difference with these two in play.

    2. Phillip Davis, Flori says:

      The premise of microfinance appears to have turned out well for India. However, I can only see it working in highly dense poor areas in the world where unemployment is basically non-existent. I don't believe it will work in America the way Obama wants to set it up as small banks in poor areas. The people in America are basically lazy due to "entitlements" or they would not be poor in the first place. The premise of difference is split between opportunity (America) and none (Third World). To paraphrase Ben Franklin: "Make the poor uncomfortable in their poverty, so they will climb out of it." I was born and raised in America to severe poverty and can say without question, that being hungry most of the time in the 50" and 60's was a good motivator to raise oneself up by the "boot straps."

    3. Bern Mebane, Crescen says:

      Very good insight into a nuts and bolts approach to financing growth at the ground level. Proof of the model.

    4. Elizabeth Hamrick, D says:

      Mr. Davis is exactly right, and further proves the point as to why free aid/handouts don't work. It wouldn't work as well in developed countries NOT because microfinance is flawed, but because the welfare state is.

      One of the reasons microfinance works so well in poorer countries is because people don't have social safety nets. They are struggling day-to-day for survival and they don't know where their next meal is coming from, so they pay back because it is either that or risk starving. Much different in developed countries, where people know that they probably wont starve if they don't pay back and are able to take the money and run.

      Just one of the many "side-notes" about MF that I would have liked to mention in this blog, but couldn't because then it would've been way too long to be a blog!

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