"'Charge 80% per year on a loan in the U.S. and you're called a usurer. Charge 80% on a loan in Latin America or Africa and you can be a poverty-alleviation charity.'That is Dean Karlan and Jonathan Zinman, in today's WSJ, "In Defense of Usury," p.A18. Karlan and Zinman discuss their study showing that micro-credit borrowers in South Africa are better off for receiving the money, even when they pay very high interest rates."
Maybe this is just the CST minor in me, but maybe instead of sitting here defending 80% interest rates (remember that many of our capitalist friends in America get worked up when the Fed Funds Rate cracks 5%) we should try to figure out how we can get this money to people at lower rates. The point is not that people are willing to pay 80% on these loans. Remember that there are people in America who are willing to work for $5.15 an hour. We could substantially increase their consumer surplus if we got these micro-loans into even the 20-30% range. But, again, that's probably just the CST minor in me. Maybe if we could get developed governments to subsidize these charities, rather than sit on the sidelines and prop up the macro-institutions like the World Bank and IMF, those lower rates might become a reality.
1 comment:
This is a great example of the argument FOR government intervention in the free market. When you have an unregulated self-regulating market economy, the equilibrium reached by the market in some cases is exploitative.
The fact that these charities have to charge 80% loans AND people are willing to accept 80% interest means that the a natural equilbrium can exist with 80% interest.
The point is that just because 80% interest loans can exist doesn't mean they should exist. If the free market is at its natural equilibrium at 80%, though, it's not going to be able to solve this problem. This is where the government needs to step in to change the market equilibrium to a more livable state.
Post a Comment