Microlending: Foreign Aid of the Future?

In many impoverished and economically undeveloped parts of the world, jobs are scarce and people without one must earn their living through some sort of self-employment. Unfortunately these “microbusinesses” often provide barely enough income for a family to survive, without paying for education, healthcare or a higher standard of living, leaving the poverty cycle unbroken.

But a small infusion of capital, sometimes less than US$200, can offer these entrepreneurs a chance to expand their businesses, bring in more money and even hire employees, thus helping other families in the process. Such microloans foster grassroots economic growth and, proponents say, can change the world, one poverty-stricken community at a time.

Microlending is being touted as the next and best wave in foreign aid. With around US$4 billion invested annually around the world, the strategy offers alternatives to those with none, while leaving out such middlemen as usurious moneylenders, despots and their bureaucracies. Produce sellers in Tanzania, grocery store owners in Mexico and dairy farmers in Azerbaijan have all benefited from this concept, and, perhaps most amazing of all, it boasts a repayment rate of 95% or better.


The strategy is not without its critics. Microlending, they say, does not truly help the poorest of the world’s poor. After all, people without food or shelter must manage their survival, their families and their health before they can manage a business or contribute to their community, and in such cases perhaps profits would be more appropriately used to upgrade living standards than repay a loan, no matter how micro. For this reason, Trickle Up, an agency working with the most poverty-stricken people in the world, issues microgrants rather than microloans.

In areas of extreme poverty, such as rural agricultural areas, local businesses have a limited clientele with money to spend, even for the necessities of life. This puts a low cap on earning potential before the business even opens its doors, the so-called “thatched ceiling,” and while a microloan may make all the difference in reducing one family’s poverty, it may not bring about a significant change in the regional economic malaise.

Additionally, microlending can carry high overhead. Some agencies, in addition to small loans, also offer business education, insurance, depository facilities, payment transfers and other financial services, all of which require staff, office space and equipment. For these agencies, according to the International Labour Organization, efficiency becomes extremely important as an overhead-cutting strategy. While it’s true that microlending is generally perceived as more of a poverty-fighting tool than an investment, nevertheless if the cost far exceeds the return then it becomes difficult to maintain the microlending institution as a going concern, never mind a profitable one.

Because of this dual bottom line, many microloans are made to women, and some organizations intentionally target them as clients. The data suggest that men tend to invest their profits in their businesses, but women fund their families—educating, feeding and providing healthcare for their children, thus reducing the effects of poverty and giving the next generation a chance for a better future. Interestingly, women are also seen as more likely to repay their loans than men, another reason they are often preferred as clients.

“Village Banking”

To be truly effective, microfinance must be local. An understanding of an area’s culture, needs and infrastructure (or lack thereof) is required before the lender can make knowledgeable decisions regarding the best use of the funds available. One solution to this problem, used with success by FINCA and other international microfinance organizations, is the concept of “village banking,” where loans are made not to individuals but to communities, who decide amongst themselves how best to use the funds and who support each other should one member prove unable to make a scheduled payment for any reason.

With these issues, microfinance is unlikely to completely replace traditional foreign aid anytime soon, and perhaps the absolute best alleviation for world poverty lies in some combination of these strategies. However, microlending’s potential for helping the world’s poor to help themselves is vast and undeniable. Unlike handouts, there’s at least the possibility of a partial return on the investment—sustainability figures for non-profit microfinance institutions currently run around 70%—which can then be used to foster economic growth in other regions. And even after the loan is paid off, what remains is an entrepreneurial spirit, healthy and educated children and a positive sense of accomplishment.

Where Can You Find Amateur Economists?

Amateur Economists is still less than 2 months old, but some major sites are beginning to notice.

News aggregators that currently index our content are Google News, Alltop, Healthcare 100, and Wikio.

The only site so far that has syndicated one of our articles is Seeking Alpha. However, we are working with a syndication company to have more of our articles syndicated, so bookmark us or, for greater convenience, subscribe to our newsfeed/email updates for future updates on this.

Other notable sites that have linked back to our articles are:

Additionally, we are also a member of the HITSphere.com network and the Freakonomics blogroll.

However, I’d like to take a few moments to talk about Alltop, the most recent aggregator we joined. They began including our content in the Economics category (or site) on Sunday, August 17. Their sites cover all the topics you can think of, from ADHD to Yoga. And they’re adding more everyday.

By visiting the Economics site, you can see that they display the 5 latest stories published by each website or blog along with links to the individual articles and the website/blog itself. Alltop sees itself “as a ‘digital magazine rack’ of the Internet. To be clear, Alltop sites are starting points—they are not destinations per se. The bottom line is that we are trying to enhance your online reading by both displaying stories from the sites that you’re already visiting and helping you discover sites that you didn’t know existed.”

Another neat feature of their site is that it allows you to hide the sites/blogs you don’t want to read, which can be very helpful since there are dozens of them in each Alltop site. If you can’t find your favorite site or blog on there, they are always open to new suggestions (see their About page). They are also working on adding more customizing features.

I encourage you to visit their site to find out more about them and other interesting sites and blogs you have yet to discover.

Finally, I’d also like to thank all of you for loyally reading Amateur Economists, some since the beginning on July 7. We’re happy to bring you the current events affecting the areas that economics has branched out to. We also enjoy your feedback, whether it be in the forums, in our feedback inbox, as comments in the blogs, or as pingbacks from your own blog. We also hope you enjoy our magazine and share about us with your family and friends. Feel free to use the “Bookmark & Share” link below each blog post and in the right-hand menu of each earticle to share your favorite articles/blogs via email or social networking sites.

Oil Market Manipulation: The FTC’s Latest Target in Fighting the Rising Cost of Oil

The high oil prices have forced the government to act once again. Earlier it was the Stop Excessive Energy Speculation Act – an attempt to rein in speculations in the oil market.

In July 2008, when the price of oil touched $150 a barrel, the Federal Trade Commission came under increasing pressure from lawmakers to act tough. The lawmakers felt that the main reasons for the high oil prices were excessive speculation and possible manipulation. The Excessive Energy Speculation Act tries to rein in speculation. To combat possible manipulation in the oil market, the FTC has proposed the anti-manipulation rule. This is an attempt by the FTC to fulfill its Congressionally-mandated responsibility to prevent manipulation in wholesale oil and petroleum distillate markets.

Perhaps the biggest and most well hidden goal of the oil manipulators is in their long term strategy. By creating a public perception that there is a shortage of oil, the blame will fall on OPEC. With an angry public attacking some of their politicians to make it better, legal restrictions prohibiting drilling in ecologically sensitive areas might be rescinded. Drilling in the Gulf of Mexico, along the California coast, in Prudhoe Bay Alaska, along the Alaskan coastline – everywhere where they were heretofore prohibited from drilling would be opened by public demand. This long term windfall would make the present flow of cash look like peanuts. And the damage done to fragile environments would be incalculable.

The rule defines manipulation as knowingly using or employing, directly or indirectly, a manipulative or deceptive device or contrivance – in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale – for the purpose or with the effect of increasing market price thereof relative to costs.

The proposed rule covers both spot and futures market and prohibits petroleum market manipulation. Under the rule, the FTC can levy fines up to $1 million per violation a day. The FTC hopes to conclude the rule making process by this year end.

The rules would bar any fraud or deceit in the purchase or sale of crude, gasoline, or other petroleum product. Fraudulent or deceptive acts, including false reporting to private reporting services or misleading announcements by refineries, pipelines, or investment banks, will be covered by the proposed rule.

The rules are modeled after the market manipulation prohibitions maintained by the Securities and Exchange Commission and targets fraudulent or deceptive conduct “that threatens the integrity of wholesale petroleum markets.” It would be unlawful for any refineries, pipelines, investment banks, or any other outfit to directly or indirectly commit fraud in the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale. There would be no new obligations or record-keeping requirements.

The proposed rules also cover the futures market – the domain of Commodity Futures Trading Commission (CFTC) and is likely to spur a regulatory turf battle between the FTC and the CFTC. The CFTC is authorized by the Commodity Exchange Act to bring an action against anyone who has unlawfully “manipulated or attempted to manipulate the market price of any commodity.”

Many experts feel that the new rules will serve no purpose. Why? An FTC report issued on May 22, 2006, found no situations that might allow one firm or a small collusive group to manipulate gasoline futures prices by using storage assets to restrict gasoline movements into New York Harbor, the key delivery point for gasoline futures contracts.