В советской России, Деньги Тратят Вас!

For those of you undoubtedly wondering, the title of this post is “In Soviet Russia, Money Spend you!”

onward, then, to BLOGPOST V

Foist things Foist, let me state what I think Amartya Sen is saying in her his(?) blurb.

The Danger she seems to indicate is in inconsistency. “Seeing poverty” as income-related, and THEN investing in things that don’t help income directly, is a bad idea. its a good way to lose money and not achieve anything meaningful. Health care and education are good “Development” goals, but terrible, terrible investments if you hope to operate in the green.

But those comics seemed to indicate something else, and Dr. H saying that the comic books were s’posed to help us figure out what Sen Says, i’ve got this lurking feeling that i’m barking up the wrong tree with my interpretation. I feel like the INTENDED interpretation was something along the lines of “Poverty =/= income only”. As the comic books indicated, it had alot to do with “FREEDOM” to be “capable” of doing things.

in other words, building mini-america’s all over the place.

Besides the inherent problems i believe exist with attempting to reform governments (its kind of like a passive-aggressive invasion, no?), there are practical problems with trying to enact SOCIETAL reforms from the comfortable padded chairs of the Econ House conference room.

But lets assume we DO want to attempt societal reform.

Honduras Constitution <= i bid thee feast your eyes upon this! especially Part 3. it looks as if they've got social equality (for the most part–i wont go so far as to say its perfect) down. (EDIT: I also don’t want to indicate that its this solid in practice. i honestly don’t know, so i dont want to speak to that.)

So politically, Honduras is solid. Philosophically speaking. I know they have this little problem with Manuel Zelaya and Coup de'tats (or however you spell that).

What about the Economy??? <= yep, their economy isn't doing so well, hence the issue with poverty.

So after a bunch of authoritarian military regimes, some statist economic policies, and a fair amount of socialism, the Honduran Economy is in bad shape. that all stands to reason.

To reiterate: the problem with Poverty in honduras stems from the economy.

Enter: La Ceiba, MFI. El dinero Gringo (hat-tip to google translate).

Our weapon of choice: Money.
Our Specialty: Personal loans.

Money can be used on the Economy. Thats good to know.

Economy can be measured by GDP.
GDP is a function of private consumption, gross investment, government spending and their trade balance.
Because poverty is clearly a problem, Private Consumption is down. Problem No. 1.
Gross investment, in this model, is a function of income. Domestic investment in domestic things. People buying a house, companies buying tools. it could by simplifying it by saying its “Corporate consumption”. Problem No. 2.
Government Spending–i read somewhere that Honduras has budget problems. Also that whole thing about statist/socialist economic policy. Government is probably spending a-LOT and earning very little. especially because of the low tax revenue which, surprise surprise, is a function of income (partially).
Trade balance? USA gives them alot of money, and their economy is 20% agriculture. I don’t think they have MUCH of a problem here, but its probably not helping that much.

Anyway, the point of all that is to show two things: GDP is dependent on 2 things that La Ceiba could help with. Personal Consumption and “Corporate Consumption”.

If our personal loans were tailored so as to help increase income by personal or business investment, and it was sustainable, then La Ceiba would be permitted to grow. In growing, more people would be permitted to be serviced. In servicing more people, we would grow some more. The cycle would rinse and repeat until–

wait for it–

–Personal Consumption rises. Gross Investment rises.

and if those rise–

–the GDP grows.

and if the GDP Grows–

–the Economy is improving.

and if the economy is improving–

–that is a sign that POVERTY is becoming less of an issue.

and if poverty is less of an issue, then by golly we’ve accomplished something.

but (to tie it all together), it ALL COMES BACK TO INCOME

5 Responses to “В советской России, Деньги Тратят Вас!

  • Being an economics major that thoroughly enjoyed macro, I appreciate your analysis. I would say however that: (a) it does not relate to what we do as an organization, and (b) you are missing a few steps in your “model.”

    La Ceiba is a Micro economic organization, dealing with the smoothing of consumption currently, and hopefully the creations of firms one day. Your analysis that this influx of income can one day increase gdp is, not only inapplicable to the problems we face in the organization, but also not quite accurate.

    Assuming, as your model does, that income comes out of no where, using the income inefficiently can result in consequences contrary to what you have advocated. Take for example a community we may potentially deal with in the future. We drop a couple personal loans to some of the women and maybe some men. This community however has a huge drug addiction problem and the income is put into an illegal market. This illegal market is not taxed by the government, which is one of the panaceas of income according to yourself, and the government is unable to provide better infrastructure for constituents. This is not to say that La Ceiba should provide a rehab center for drug addicts, but rather that there are variables outside of income that affect standard of living.

    An example slightly more relevant to our own clients is the ability to read. Many of our clients are illiterate. They may be able to vocalize a business plan, but unfortunately few banks will accept this for a loan. So, where our capacity ends, so to does their capacity to expand and grow. They may become wealthy comparatively to those around them, but will never achieve a level of wealth consistent with changing gdp. Again, this is not to say that La Ceiba should build a school, merely that unless the attitude toward education changes for young children, a higher level of income will not be reached.

  • russellscott
    14 years ago

    I’ll concede some of the finer details of the Economics–that is your major, not mine.

    However, you say that the more relevant problem to clients (more relevant than income, even) is the ability to read.

    I know i asked you this in a comment on your blog post, but how do micro-loans teach anyone to read? more specifically: how do micro-loans, the spending of which we have no say or influence in, drive anyone to want to read? How do micro-loans change the attitudes of children?

    I’ll reiterate the question i posted in your blog post–would you say that our money would be better spent, then, as a charity? Using donor funds to directly execute the changes you are discussing, rather than indirectly through microloans?

  • I do not think Sen is saying that we need to make little Americas around the world or that we need to reform countries. Sen is just stating that impoverished people are lacking the freedoms we enjoy. These freedoms must be in place in order to lower the transaction costs of an exchange and to lower the uncertainty of a market.

    Sen gave the example of India. In India, there is freedom of the press and a free market, and therefore, India has not had a famine since 1947. On the flip side, India failed when it came to illiteracy and health care, and therefore, still has poverty throughout. Due to the lack of freedoms, people in India are still impoverished.

    There is no need to create democracies throughout the world. In fact it would not be possible. People in different cultures set up different institutions and organizations that work for their particular culture. All Sen is saying, is that the institutions in place need to facilitate freedoms to enhance the lives of the people and not deprive them.

    You are oversimplifying everything. I agree that the economy in Honduras may have caused a lot of problems, but what you are forgetting to consider is that something caused the economy to develop in a “bad” way. These are the institutions and informal constraints (moral order and cultural norms) that have allowed an inefficient market and economy to develop and be sustained. By simply increasing incomes, people may have more money to buy things, but corruption and the problems of the society as a whole will still exist. If the women we are giving loans to now have more money to spend, but aren’t allowed to attend school or vote, what good have we really done?

    Sen points to change from the inside out. It has to start with the people through cultural change. Institutional change will facilitate a “good” state to emerge allowing for increased prosperity and thus increased incomes in the end. Income is a good indicator of change, but it is not the goal we should be aiming at.

    • russellscott
      14 years ago

      just point of nitpickery, did you read the Honduran Constitution, particularly part 3? I provided those links for you, to point out that 1- they ARE a democracy, and 2- their freedoms ARE assured, at least nominally, within their constitution.

      And i’ll reiterate my point, with necessary modifications:

      how does microfinance help anyone have the right to vote or permit them to attend school? Could La Ceiba accomplish this more effectively as a charity?

      How do you propose La Ceiba use micro-loans to change honduras from within?

      • The fact that these “freedoms” are enshrined in the constitution effectively means nothing, for several reasons. First, formal institutions mean nothing without informal ones (such as cultural norms) that support them. There are plenty of countries that nominally have free democracies, but in practice do not, and this is not simply a product of corrupt governance or some other scapegoat but rather of the culture. Also, we cannot assume that the constitution emerged naturally or was in any way indigenous. The close presence of the US, as well as the military history of Honduras (which I don’t presume to be in any way an expert in) means that we can’t assume that our own pattern of constitutional development occurred. Unlike in our models for understanding the emergence of formal institutions, potential states do not exist in a vacuum, and we must consider the imposition of a constitutional democracy (no matter how well-intentioned) as a possibility and an explanation for its failure.

        I think this whole discussion of how La Ceiba is going to change attitudes from within sort of misses the point: we can’t. We just have to be aware that our loans are not going to fix everything, because they only deal with income.

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