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What is Credit?
Credit is really another name for borrowing. Businesses borrow money (on credit) to grow their businesses and create more goods and services. Individual's borrow money (on credit) to buy more goods and services.
What is credit's relationship to Investment?

Credit is really a form of Investment in the economic growth of the society. Investment can only be made based on the amount of savings. If a country has a low savings rate, they will have to borrow from foreigners or get foreigners to save in their country.

Obviously this all works better in a developed country with the resources and established markets to capitalize on growth. Here is a map with a way to think about the world and the size of the economies within it. The smaller countries are the Less Developed Countries or LDC's.

In developed countries, Investment happens on a "macro" scale.

The famous equation by Keynes: GDP = C + I + G + X

What is the historical background to Keynes?

I. Depression (Government spending on work projects, Hoover Dam, CCC all pump money and growth into the economy)

II. WWII (Government spending on war creates growth for the U.S. but drains the resources of Europe where active fighting precludes market activity)

III. Post War - Economically, post-war means Bretton Woods. The economic blue print created there to restart growth included

1) for Europe the Marshall Plan. Europe borrows from U.S. money to rebuild. The U.S. invests in Europe. The rebuilding is on a macro scale: roads, factories, infrastructure.

2) World Bank/IMF (International Monetary Fund): Take the macro principles of large investments in projects (dams, infrastructure) and export it to LDC's.

The following table gives you some idea as to the amounts of aid donated.

What is at stake? or Society needs growth Why?

POVERTY

 

Click on the following link to see a presentation about growth and poverty in LDC's prepared by Economist Steve Reff. Reffoneconomics

What creates the poverty trap? Click here for list of constraints LDC's face for development.

Does global Macroeconomic Investment (credit) Work?
  Here is the $20 trillion question. Many would argue (see article by Charles Gore, UNCTAD) that macro investment did not alleviate a poverty trap within LDC's. Others, notably Professor Sachs (see NY Times article) argue Macroeconomics would work but the size of investment needs to be MUCH larger.
Micro Credit: an alternative

What is Microcredit? (see Microcredit article by Results) Created by Muhumad Yunus when he began the Grameen Bank in Bangladesh, Microcredit makes small loans to mostly women in severly economically depressed economies. An annecdote from Yunus probably answers question best. Professor Yunus taught macroeconomics (as he learned it from his education in U.S.) in a Bangladesh University. Everday he would see in the local village abject poverty that negated the means to growth he lectured about. One day, he gave a woman $2. Now rather than get leather from someone, who told her what shoes to make and then would sell them for her when she was done, she could buy the leather herself, make the shoes, and sell them. She would be able to repay the loan AND buy more leather to continue the cycle of growth. From this idea a bank was built:

Some statistics:

Grameen Bank made loans to 2.6 million people 95% of them women

Grameen Bank (over 20 years) has made approximately $3.6 billion in loans in 3 types:

  • income-generating loans (interest = 20%)
  • housing loans (interest = 8 %)
  • education loans (interest = 5%)

98% of all loans have been paid back with interest (i.e. profit to the bank)

Grameen bank operated profitably in 17 out of last 20 years (HOW? click here for the lending steps of the bank.)

What does Microcredit do?
It creates economic growth through small development of goods and services. Each loan recipient receives a small capital stake with which to create a good for sale. The sale of the good makes it possible to repay the loan and buy more materials to make more goods. Here is a look at the aims of Microcredit.
Could Microeconomic Investment work?
 

Professor Yunus argues, YES!. Follow the following link to Food And Agriculture Oranization article on Microcredit. Scroll down to the results table at the end. In fact, he argues by 2015 world poverty could be eradicated. Leaving us with nothing to view but poverty museums.

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