Continuing my commentary on remarks from the AEC blog, I'd like to address the issue of micro-credit. Though micro-credit has proven to be quite effective in many development projects, it is not the panacea that many once thought it was. This is not because of any inherent weakness in the concept of micro-credit itself, but is instead related to the legal structure of property rights in so many developing countries.

The foremost thinker and activist in this area is Peruvian economist Hernando De Soto. After studying the nature of property rights in Lima, De Soto realized that the legal constraints on business formation and maintenance were so bureaucratic and convoluted that the vast majority of entrepreneurs opted to sell their goods and services in the city's extralegal sector. The Institute for Liberty and Democracy's webpage elaborates: "90 percent of all small industrial enterprises, 85 percent of urban transport, 60 percent of Peru's fishing fleet, and 60 percent of the distribution of groceries emerged from the city's extralegal sector."

 
The Peruvian example illustrates a reality that is prevalent throughout the developing world. Because the vast majority of Third World entrepreneurs have been forced out of the legal marketplace by excessive red tape, they are unable to use their fixed assets and cash flow to attract capital investment for growth. In order for micro-credit to be a viable development strategy, massive legal reforms are needed to give the Third World extralegal sector the same competitive advantages enjoyed by most citizens of industrialized nations.

This entry was posted on Friday, November 11th, 2005 at 7:00 am from Agroblog Central @ 35° 07' 24" N, 106° 31' 60" W, and is filed under Development. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.