Wednesday, April 9, 2008

Capitalism is NOT a zero-sum game

After Mexican micro lender Compartamos (“let’s share” in Spanish) went public, it raised over $400 Million, and then earned a 40% return for its investors. Predictably the non-profit world went nuts, vilifying them as "pawnbrokers" and "money-lenders," earning "obscene" profits off of poor people. Even Vandy grad and Nobel Laureate Mohammed Yunnus (DISCLAIMER: he never took my class, but I am overnighting a copy of my textbook to hiim) criticized their emphasis on "investor returns" rather than helping the poor.

Both sides agree that there is a need for capital, too great to be met by the donor groups that initially financed microlending. Deutsche Bank estimates the global demand for microfinance loans at about $250 billion, 10 times the amount that has been lent.

But Compartamos’s decision to go public last April became a flashpoint in what had been a genteel debate over how microfinance could tap into the financial markets’ vast resources. The initial public offering gets special mention at every microfinance conference, and has been condemned by Mr. Yunus, the Nobel laureate.

Seems like the lefties are missing the main point: voluntary transactions create wealth because they benefit both parties to the transaction. It also sounds as if the criticism would be better aimed at the Mexico's red-tape, taxes, and barriers to entry:
On average, customers pay an annual interest rate of almost 90 percent, which includes 15 percent in government tax. In much of the world, microfinance interest rates range from 25 to 45 percent. But in Mexico, high costs, inefficiency and limited competition keep interest rates much higher. Compartamos’s rates are only a few percentage points higher than Pro Mujer’s [a competing non profit lender].
[thanks to colleague Bart Victor for tip.]

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