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Put Your Faith in Microfinance

On June 1, former Deputy Defense Secretary Paul Wolfowitz became the next head of the World Bank. His mission: to end global poverty. The trouble is, few agree on how to go about it. So Foreign Policy asked five of the world’s leading development experts to offer Wolfowitz some free advice on getting the job done.

Clearly recognized today as the only efficient way to fight poverty, microfinancing provides poor people with badly needed access to credit. Typically, poor people have no property and, hence, no collateral. Without collateral, they have no means to secure a loan. So the entrepreneurial ability and ambition of poor people is blocked by their lack of access to credit. Microfinancing unleashes that entrepreneurial ambition by offering small loansnormally in the hundreds of dollarsas start-up capital at normal interest rates. The global repayment rate for microfinance loans is about 98 percent. These loans allow families to get out of poverty, send children to school, and finance healthcare costs. They also help poor people garner the resources necessary to defend their freedom and democratic rights.

Today, 10,000 microfinance institutions around the world serve some 80 million clients. The potential worldwide market for microfinancing is probably in the neighborhood of 800 million people.

Microfinancing is the most efficient and least expensive instrument for fighting poverty that Wolfowitz and the bank have at their disposal. By providing poor people with a necessary instrument of entrepreneurship, microfinancing is also the best way to foster free markets and democracy in the regions where that system is needed most.

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Feature

Put Growth Ahead of Aid

On June 1, former Deputy Defense Secretary Paul Wolfowitz became the next head of the World Bank. His mission: to end global poverty. The trouble is, few agree on how to go about it. So Foreign Policy asked five of the world’s leading development experts to offer Wolfowitz some free advice on getting the job done.

Paul Wolfowitz has a choice. He can eradicate poverty directly by dispensing medicines to poor people, funding clean water, educating and empowering those with few resources (especially women), and so forth. Or he can eradicate poverty indirectly, by stimulating broad economic growth in the worlds poorest regions. This is not a return to the old-fashioned Washington Consensus of just let markets work. Economic growth that favors the poor improves the climate for business, promotes domestic and foreign investment, and reduces barriers to trade.

The two approaches are not incompatible. Local firms and international investors need well-trained, healthy workers to become competitive, expand employment, and penetrate new markets. But under outgoing bank President James Wolfensohn, the bank has overemphasized trying to relieve the problems of poor people directly. The more effective way to bring people above the poverty line is to stimulate economic growth. Seven years of growth at 5 percent in India reduced national poverty by 6 percent. During the same time period, 6 percent economic growth in Vietnam reduced national poverty by 7 percent; 8 percent growth in China reduced national poverty by 8 percent.

If Africa could achieve growth rates of 4 to 5 percent over a decadehalf the rate in Chinathe resulting poverty reduction would be far greater than what would result from a doubling of the foreign aid budget to the troubled continent.

The criticism that the World Bank does not have any priorities is misplaced. The real problem is that every country director and country strategy team at the bank have 20 No.1 priorities. Wolfowitzs real contribution will be to decideand enforcewhat the true priorities are. He can only alter the course of the World Bank by a few degrees and he should not completely eliminate direct poverty-reduction programs. But he should shift the banks priorities toward stimulating broad economic growth for the poor.

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