ANGLIA RUSKIN UNIVERSITY
ASHCROFT INTERNATIONAL BUSINESS SCHOOL
BUSINESS STUDIES FIELD
Assignment for:
International Economic Issues
Level: 3
Word Count: 1967
Submission Date: 14th December 2005

Do Microcredits offer a practicable solution
for sustainable growth
in the economies of developing countries?

by

Jonas Schirm

Contents

Tables 4
Abbreviations 5

1. Characterisation of the Problem 6
1.1. Do not measure a country by its income alone 7
1.2. Growth vs. Development 7

2. Governmental Options to form a Generative Economical Environment. 8
2.1. Monetary Policy 8
2.2. Role of Central Banks 9
2.3. Exchange Rates 9

3. Microcredits 10
3.1. Origin and Development 11
3.2. Function 12
3.3. Micro Financial Establishments 12
3.4. Downsides of Microcredits 13

4. Summary 14

5. Bibliography 15

6. Appendices 17

Tables

Table 1: Less Developed Countries (LDC)  6
Table 2: Causes of dollarization 10
Table 3: The main aims of Microcredits 12

1. Characterisation of the Problem

The aim of this essay is to present the purpose and exigency of financial aid for developing countries and new approaches by which financial aid can lead to sustainable growth.

More than three-fourth of the world′s people live in developing countries, but they enjoy only 17,3 % of the world′s income - while the richest 20% have 82,7 % of global income. (IMF 2001)

Table 1: Less Developed Countries (LDC)
Source: World Bank 2001

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The definition of Less Developed Countries (LDC) is not very precise. The common approach to define a country as LCD is in regarding the economy. A big part of the economic issues are a result of low creation of value (productivity). Due to major parts of inhabitants of LDC being employed in the primary sector, in which economically very little value can be created. The exports are basically generated by the primary sector (i.e. agricultural goods or natural resources). The strong commercial adjustment to industrialised countries has, among of others, its routs in colonialism. Most aid is regulated by the United Nations (UN) which is a world council of different nations. The UN also differs between LCD and LLCD (Least Developed Countries) which are a group of countries within the United Nations Organisation (UNO) which are ever poorer than LCD.

Due to relatively unsuccessful efforts to reduce poverty in the past a new idea came up. Unfortunately there is no measurement like return on investment at aid. This essay will show were the problems are and what is done to solve them more sustainable than in the past. One new approach is the usage of Microcredits which I will give details about after explaining the initial position of the problem.

1.1. Do not measure a country by its income alone

No society can surely be flourishing and happy, of which by far the greater part of the numbers are poor and miserable. (Smith 1776)

The idea that income and wealth are not the final stage of being a happy and fulfilled person can be found from Maslows Hierarchy of Needs to Aristotle.
Amartya Sen, the 1998 Nobel laureate in economics, argues that the "capability to function" is what really matters for status as a poor or not poor person. As Sen put it, "Economic growth can not be sensibly treated as an end itself. Development has to be more concerned with enhancing the lives we lead and freedoms we enjoy" (Todaro 2002).

Sen argues that what really counts is what a person is, can do and does. E.g. a book has very little value to an illiterate person.

1.2. Growth vs. Development

A common critique of the theories in the last preceding paragraph is that a human′s motivation is not only the capacity to act. Furthermore the underlying motivation is driven by the desideratum to live. A changing environment implements a generative economical environment. That change is a major problem developing countries often face. It is a predicament between growth and development. The problem is that growth occurs because of an increase in inputs, at a given production function, but the inputs can not be raised because of the weak production function. On the other hand development occurs because of a change in the production function, but the lack of generated profits does not empower the national economies to purchase. In other words, unless there is some major structural, attitudinal, and institutional reform in the world economy, which accommodates the rising aspirations and rewards the outstanding performances of individual developing nations, internal economic and social transformation within the developing world remains being insufficient (Adelman 1997). As a result of reflecting Adelmans findings the inappropriateness of aid which is focused on governments gets obvious. The first step of economic development always has to be made by the citizens. The government only can deliver a generative economical environment.

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