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Thing 15

People in poor countries are more entrepreneurial than people in rich countries

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Chang, H. (2011). Thing 15. In Chang, H. 23 Things They Don't Tell You About Capitalism. Bloomsbury Press, pp. 157-167

[...] without subsidies from government or international donors, microfinance institutions have to charge, and have been charging, near-usurious rates. It has been revealed that the Grameen Bank could initially charge reasonable interest rates only because of the (hushed-up) subsidies it was getting from the Bangladeshi government and international donors. If they are not subsidized, microfinance institutions have to charge interest rates of typically 40-50 per cent for their loans, with rates as high as 80-100 per cent in countries such as Mexico. When, in the late 1990s, it came under pressure to give up the subsidies, the Grameen Bank had to relaunch itself (in 2001) and start charging interest rates of 40-50 per cent.

as a result of this, people are more likely to take out loans for consumption smoothing than to actually start businesses, since it seems so unlikely that they'll make enough profit to pay off the loans ... even when they do, the high interest rates mean that it's unlikely to help them get out of poverty

the other problem for businesses is that as a particular market segment gets crowded (e.g., renting phones), profits will of course fall ... and it's very difficult to simply switch to a different segment, due to limited skillsets, poor infrastructure, and limited access to capital (for example, you can't expect them to just start writing software for the phones)

he cites Milford Bateman's Why Doesn't Microfinance Work? for further reading

by Ha-Joon Chang 2 years, 4 months ago

[...] without subsidies from government or international donors, microfinance institutions have to charge, and have been charging, near-usurious rates. It has been revealed that the Grameen Bank could initially charge reasonable interest rates only because of the (hushed-up) subsidies it was getting from the Bangladeshi government and international donors. If they are not subsidized, microfinance institutions have to charge interest rates of typically 40-50 per cent for their loans, with rates as high as 80-100 per cent in countries such as Mexico. When, in the late 1990s, it came under pressure to give up the subsidies, the Grameen Bank had to relaunch itself (in 2001) and start charging interest rates of 40-50 per cent.

as a result of this, people are more likely to take out loans for consumption smoothing than to actually start businesses, since it seems so unlikely that they'll make enough profit to pay off the loans ... even when they do, the high interest rates mean that it's unlikely to help them get out of poverty

the other problem for businesses is that as a particular market segment gets crowded (e.g., renting phones), profits will of course fall ... and it's very difficult to simply switch to a different segment, due to limited skillsets, poor infrastructure, and limited access to capital (for example, you can't expect them to just start writing software for the phones)

he cites Milford Bateman's Why Doesn't Microfinance Work? for further reading

by Ha-Joon Chang 2 years, 4 months ago

[...] what makes the poor countries poor is not the lack of raw individual entrepreneurial energy, which in fact they have in abundance. The point is that what really makes the rich countries rich is their ability to channel the individual entrepreneurial energy into collective entrepreneurship.

specifically, you need the right infrastructure in place: access to the initial knowledge and capital needed; a respected framework of company and intellectual property law; an educational system that produces capable employees. it's not that entrepreneurs in rich countries are better, it's that they're given an environment in which they can more easily flourish, whereas those in poor countries are in a much more hostile environment (at least when it comes to the same level of success)

by Ha-Joon Chang 2 years, 4 months ago

[...] what makes the poor countries poor is not the lack of raw individual entrepreneurial energy, which in fact they have in abundance. The point is that what really makes the rich countries rich is their ability to channel the individual entrepreneurial energy into collective entrepreneurship.

specifically, you need the right infrastructure in place: access to the initial knowledge and capital needed; a respected framework of company and intellectual property law; an educational system that produces capable employees. it's not that entrepreneurs in rich countries are better, it's that they're given an environment in which they can more easily flourish, whereas those in poor countries are in a much more hostile environment (at least when it comes to the same level of success)

by Ha-Joon Chang 2 years, 4 months ago