Bigger or more efficient economy?

Conventional economic wisdom says that lowering the price would increase the demand, so when a country is seeking more investment they might try to lower the interest rate on the credits to make people to get more credits to invest more.

However, this doesn´t consider the quality of the investments being made. Having a low "money price" this way can lead to people valuing money less and thus putting less thought on how to use it. This could lead to risky or bad investments that won't improve the economy in the way more investment is expected to. The opposite happens with high interest rate, or at least it seems so from the microcredit experience.

Microcredit are small loans given to low-income people who wouldn't satisfy the requirements of a normal bank to get some credit due to the lack of properties. In order to guarantee that the borrower can be trust they borrow in groups in small communities in such a way that if one in the group doesn´t pay back, all the group is affected (not getting future credit for example). Furthermore they sometimes reduce risk by starting with very small loans and increasing them as the group pays on time. One characteristic is that micro-credit usually have much higher interest compared to other credits, sometimes over 30%. Despite this, the payment rate is very high, reportedly between 95-98%. Microcredit is used to help low-income people to improve their situation by allowing them to start small business. There are critics about this, but the general idea is that low income people need little money to do simple economic activities that can help them get out of poverty. For example, by borrowing $50 a woman could buy chickens and sell the eggs. The chickens reproduce so she can eventually also sell chickens. Even if this is a small business the returns of investment are really high, and it might give enough profit to sustain a family.

So the logic of why microcredit works despite the high interest rate is that people know they have to make a big payment for the money they are getting, so they only get the money if they have a investment opportunity with a good return of investment. If this is true, this would lead to a much smarter use of money and thus an improvement in the overall efficiency of the economy.

So is it better to have a bigger economy or a more efficient economy? Both would be the quick answer, but by increasing the supply of money, its price goes down so there are less incentives to use it in a more efficient way. So perhaps policy that promotes a bigger economy would reduce the efficiency of it.

Bigger or more efficient economy? which one do you think is better or in which conditions one is better than the other one?



Reference and more information about microcredit:

• http://www.grameenfoundation.org/what-we-do/microfinance-basics

Government: to rule or to serve?

Here comes the by-yearly post of this blog!!!!
Just joking... these days I'm doing research on Green Growth so I'll try to update this blog more often in that topic

This morning I had a thought I wanted to share and maybe hear some comments. Governments are so ubiquitous and yet there´s no definitive conclusion as their role in the different aspects of a nation. Several theories support fairly opposite points of view as can be seen from Capitalist vs Socialist in the role of governments in the economic sector, or Realism vs Liberalism vs Constructivism in the role of governments in the international arena. Few, if any, points are accepted by all the people who study this themes, and as normal (and even likable) can this sound for a political scientist, to my engineer mind this is ridiculous, even my managerial side says at least a fairly open framework should be clearly defined and agreed to be able to at least talk about this topic. You can even say that governments are a social construct created in everyone's mind, projected into a social concept space that is imperfectly applied in the set of laws, institutions, organizations, etc. and thus it can't be defined.

So by taking advantage of this common practice of evolving new ideas and putting them in the table without really aiming to build up on previous attempts but more like trying to convince as much people to see the world in my way. Furthermore, differences in conceptualization are important to create change and this is probably the main reason why I think this idea is probably a bit better than the usual ones that I have. What I want to put here is my initial thoughts about how the relationship between the government and society should be.

Usually government is thought as an entity that rules over society. In different ways or different objectives, it is the government who has the authority, in many cases given by society, to basically set the ground for everyone to live. This pyramidal or top-down structure is present even in the most advanced democratic systems where decisions are overseen by society but the function of the government is the same. However, this seems to me a bit an outdated perspective that even doesn´t match with some of the current actions of governments. These days, rather that promoting a collective behavior, many efforts are focusing in the individuals. Human rights, special infrastructure for handicaps, differentiated education, no discrimination, ethnic wars, you name it... many of the practical aspects in which governments all over the world are struggling are about how different people should be different better. Problems between different ethnic groups, races, social levels, and such are probably the consequence of the previous trend of letting everybody do what they want called freedom (which as surprising as it sounds, was not so important a few hundred of years ago, when being part of a group was critical for survival so control was accepted).

I think that government, instead of being a giver, should be a supporter of the people.

If governments aim to support the individual goals of all the people in a society, then you'll have a system that offers you better opportunities. This, however, gives back to the people the responsibility of survival, which is risky, but still that match the elections of many people today, who are eager to detach from their original countries and pursue education or work in a different place. Government should then offer them better means to be successful as the only way to make sure successful people will stay in a country and make it better. Even if migrants might still be a small proportion of the population, the impact of this trend is impressive in some small towns where most men already left searching for better opportunities.

Now, one important clarification is that by government I don´t mean just the people in power. Through all this post when I refer to government I mean the whole system that governs, which includes the people, the institutional structure, and the legal framework. The change in the conceptualization should not be understood as a change of policy, but as a change in the "utopic" vision of what a government should be that would lead the evolution of a government in that direction. As such this can´t be a quick change, but it must be a deep one. Concepts as fundamental as the geographical designation of leaders (local, regional and national) should be rethought, maybe thematic leaders would make more sense?

An important effect of this conceptualization is that government will no longer fail to provide to its society, but will offer different means of support. So for example, a specific social group might require some particular infrastructure. In current conceptualization, they are citizens of a country and the government should provide them with the basic elements to develop their activities, otherwise this group would vote or fight against the ruler. In the new conceptualization, government would do its best to provide the means they need to keep them in his territory and to make them develop, which in turns gives benefits to the government in terms of increased tax or stronger position. Providing services becomes a strategic decision for the government, rather than a requirement to be fulfill. Citizens are no longer allowed to demand services since they can move to a different country to get them. This seems to match better what is happening today and in the long term could lead to a increased efficiency through specialization and competition in the "international market" of governments. 

Using market mechanisms to guide governmental development seems scary at first sight, as capitalism lack any moral grounds that could be considered important for governance. However, wouldn't this be the ultimate democracy? One where people accept and support the government with their action of living in their territory. In this sense the specialization doesn´t happen only in the services offered, but also in the kind of people that live in different areas. Common wisdom says that pleasing everyone is impossible, however if you group in different areas people with similar tastes and then you offer them what they want in a differentiated way, it can be done. This is the ultimate vision and not something that will actually be achieved perhaps, but the underlying idea that could guide the evolution of governance in the future with the ultimate goal of improve as much as possible the quality of living of everyone.