An interesting piece caught my eye in yesterday's Washington Post, highlighting a shift in the way agencies, financial institutions, and non-profits are seeking to address world poverty. For a time it was believed access to credit, even in small amounts (so-called "micro-credit"), would open the door for millions to raise their living standards. Following the collapse of the world economy in 2007, many of these micro-borrowers defaulted, revealing a major weakness in the micro-lending model, and leading some to believe that savings--not credit--would more effectively reduce poverty world-wide.
It's a topic I find personally interesting as I develop my own philosophy of finances. And anyone who has read the post of my experience as a tosher will know that the idea of saving, even pennies at a time, is one on which I put considerable weight.
My thought is if one manages to spend less than one earns, the result is a surplus. Surpluses can be put toward any number of uses; for example debt repayment, unforeseen expenses, or the creation of more surplus. Surpluses make investment possible, and I think investment, more so than credit, holds the possibility of improving living standards.
Don't get me wrong, credit has its uses. In the US, many people today use credit to finance things such as an education, a house, or the start-up costs of a new business. Credit has its place, but it is not necessarily wealth; spending-power perhaps, but not wealth. It lets one invest in the short-term, but only rewards those investments which offer a sufficiently high return to pay it back. The trouble is that return is not always easy to calculate (for example, with higher education today), and sometimes, to use a phrase of Thomas Friedman's, we misread our environment. So while credit has its use, it does not insure the creation of wealth.
On the other hand, savings by their nature constitute a surplus, and a big surplus has advantages. For example, it let's you be choosier about what you do with your time. Ample savings might mean you can do uninspiring work less, and interesting work more. It may also mean you can pursue interests or goals that do not necessarily have a monetary payoff. One can also afford to be generous when they've acquired a bit of savings, if generosity so moves them.
The point is that on balance, I feel savings (for individuals, not necessarily governments, for reasons I won't discuss here) are more advantageous than access to credit, and that the trend of emphasizing savings as a way of lifting people out of poverty is a positive development. Micro-lending has a place in the equation (particularly for entrepreneurs), but for many people I suspect strategies to help them save even a little consistently would go further in raising world-wide living standards than simple access to credit. I'll be curious to see how these new initiatives play out.
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