George Mason University economics graduate student Steve Daley and the Mercatus Center’s Brian Hooks wrote this very nice op-ed being distributed today by UPI. It’s on microfinance – a topic that these guys know very well.
Steve Daley, for instance, spent two summers (plus another several weeks during the school year) in the Philippines talking with small entrepreneurs and acquiring very detailed knowledge of the opportunities and barriers they routinely confront. It’s inspiring to see how many of these very poor people overcome obnoxious and unnecessary obstacles to build better lives for themselves – and, in the process, create small enterprises that improve the lives of their customers and workers. Micro loans help many of these entrepreneurs.
For more on Steve’s research, see this useful paper.
But as Daley and Hooks explain, the root reason that significant economic growth in most poor countries doesn’t happen is not lack of capital. It’s dysfunctional institutions – dysfunctional regulations and laws, and dysfunctional social norms.
Capital will go to where investors expect to earn good returns. Investors will come to expect to earn good returns only when and where property rights become more widespread and secure and where both laws and social norms at least tolerate economic change, entrepreneurial success, and the commercial spirit.