Natalie Solent

Politics, news, libertarianism, Science Fiction, religion, sewing. You got a problem, bud? I like sewing.

E-mail: nataliesolent-at-aol-dot-com (I assume it's OK to quote senders by name.)

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Friday, April 15, 2005
This is not another post about interest rates.
"The question that I really don't know the answer to is whether high interest rates actually hinder development. Maybe, by discouraging foolish prestige projects, they help it. On the other hand sensible people who want loans for sensible projects pay the price for the folly of their compatriots."
The same reader as before now writes:
Ahh, that's far more complex.

The short version:

That's not an interest rate problem: Much of the third world population is not even in the position to worry about rates, the underlying planks to allow a capitalist to stand on don't exist/are rotten/ are cut away.

My longer blathering:

The folly of compatriots is a big thing, if your nation is a deadbeat with a history of socialism / bank nationalizations/confiscations, an opaque legal system and corruption sliming along the high street in full view. Then obviously, no matter how good you might personally be, or how good your business idea, you are dead inthe water. Either the banks don't exist, or they are smart enough not to loan to you.

The sterotypical black African wanna-be entrepeneur can't get traction, even if he can round up enough funds, because whatever he builds will be stolen (legally because the legal system stinks, or by main force), or the profits sucked away in corruption. Or that's the perception.

That's not an interest rate problem: Much of the third world isn't even in the position to worry about rates, the underlying planks to allow a capitalist to stand on don't exist.

Hence in some places you get powerful families as the only ones able to engage in business, they have the muscle to enforce "private law", and the money to self invest so their risk calculations are wholly different than that of a third party. That doesn' trickle down much. Lot's of really great ideas languish inthe swamp.

Governments are another kettle of fish, by and large their loans are not "bank loans" per se but often special politically motivated development loans, sometimes guarenteed by third parties. Sometimes outright grants disguised as loans.

I like to think of these as free heroin for junkies. You know the money will be pissed away to no longer term avail.

International financial org's get involved, and they have smart people choosing projects that are worthwhile at advantageous rates, they may have done so in the past, but often they are now staffed by PhD's who miss the forest for the trees. The projects often don't make sense in the end after billions have been spent. e.g. Sure, Country Z needs a new power plant, but if the project doesn;t take into account that 45% of the customers don't actually pay their bills or outright pilfer the power and the rest pay a subsidized rate that has no relation to the cost of generation and transmission, then what? Subsidies can cause huge distortions & waste. The rate you pay to make the investmnet in the powerplant and the "official rate" you get paid for the power is irrelevant.

Almost every single third work country and poor country is that way because their policies and laws and practices are corrupt or just abysmally stupid, and the economic signals don't get transmitted - or worse, the wrong signal is emitted, so that the " invisible hand " acts in perverse ways.

They stay that way because a small groups really profit from it. See "public choice theory."

Yes, I know I said this was not about interest rates. I lied.