Capital vs. Institutions
By Arnold Kling
The reason some of the poorest countries in the world need microfinance is because deep-rooted institutional problems make the general financial sector unworkable. And until these problems are addressed, we are reduced to celebrating an appallingly small-scale solution to the biggest problem facing humanity today: abject poverty. For the poorest of the poor to make real progress on a global scale, more fundamental changes must be made.
…The poor can’t access the larger financial sector because banks in many countries are rewarded for making loans based on political ties, not demonstrated business savvy. And worse, many countries, the Philippines among them, restrict ownership of land and businesses based on membership in racial and ethnic groups. These laws and corrupt practices need to be targeted and a line needs to be drawn in the sand. At the very least big aid donors like the United States need to stop showering millions of dollars on countries that refuse to address these fundamental concerns.
For years, development economists believed that the problem with poor countries was lack of capital. The alternative point of view that has emerged is that what poor countries lack are institutions that allow entrepreneurs to function.
For Discussion. Which is an easier problem to solve–a shortage of capital, or institutional deficiencies?