Friday, May 20, 2011

Cuba needs free enterprise for microcredit to work

Posted on Thursday, 05.19.11

Cuba needs free enterprise for microcredit to work

Microcredit lending will only work in a Cuba with free enterprise,
democracy and proper legal institutions. It won't work in the current
state of Cuba's political and economic system.

Microcredits, lending small amounts of $2,000 or less to start up
businesses, are widely embraced by developing countries, rich countries
and multilateral lending institutions, such as the World Bank. In 2008,
development agencies committed more than $1.5 billion to microfinancial
institutions around the world.

Since financing is important for entrepreneurs and microlending seems to
be filling an important vacuum in the marketplace, it would appear to be
an essential ingredient in the policymakers' toolbox for encouraging
growth in a free Cuba. But the reality is more complicated.

Many microlending institutions operate with the aid of subsidies from
nonprofit organizations and foundations, governments and multilateral
lending institutions. There are signs that a growing number of
micro-lenders have since become profitable, but this good work will
remain limited as long as they're forced to rely on subsidies. There
isn't a bottomless well of nonprofit or government support for this

Another question surrounds the ability of microlending, even if
subsidized, to produce sustained economic growth. Microborrowers use
their credit overwhelmingly, if not exclusively, to create what is
labeled replicative firms, or enterprises, that simply reproduce what
many others have done or are doing. Economies can grow only so much
through replicative activity.

For economies to enjoy further growth, some portion of the replicative
enterprises must grow substantially larger. Or, some firms must begin to
transform themselves into innovative enterprises, selling new products
or services. Countries must have the laws and institutions that will
enable those who make it to the first rung to climb higher and, in the
process, drive economic growth for their entire economy.

The supplement to make a microcredit work in a democratic Cuba is the
development of incubators to assist those with entrepreneurship and
innovative talents to develop further their ideas with the proper
assistance in technological and managerial skills before starting a new

Manuel Cereijo, Miami

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