Saturday, May 16, 2009

Does microfinance help?

IPA points to a recent article in the Times Online that argues the craze over microfinance is ending.

Personally, I have always been skeptical of it. Anecdotes from friends that (used) to work at Kiva in Uganda suggest that the poor get no business help or training, and so often have no idea if their small businesses are profitable (many are not). Some are then caught with having to refinance their original loans indefinitely. Yunus was wrong, the poor do not have the innate ability for business. They may have the desire, but for many the skills are lacking.

I have not lost all hope. Caitlin Weaver at IPA is right to note that microfinance has a lot of uses beyond just solving poverty. Oftentimes it serves nothing more than keeping a family afloat. I have also personally seen when giving money to the right person can really pay off for them amnd their family.

The Times Online is correct though that the end goal, of ending poverty, is not necessarily being served by microfinance. I am writing up a project now to look at what mechanisms can help individual businesses improve, whether grant or loans. Specifically, I want to know how important impatience, credit and savings constraints are, and whether they can be solved through simple carrot (bonus funds at the end) or stick (community oversight and income accountability) mechanisms.

The end idea is to look at how to help grow a microbusiness (no employees) into a small business (a few employees).


Lee said...

Do you know of any research which shows that growing microbusinesses works?

My current perspective is informed by this paper by La Porta and Shleifer - "The unofficial economy and economic development".

Their conclusion is that:

" The overall picture of economic development that emerges from this analysis is in some ways very similar to the traditional pre‐growth‐theory development economics, although it is related to the modern reformulations of economic growth through the lens of development economics (Banerjee and Dulfo 2005). The recipe for productivity growth is the formation of official firms, the larger and the more productive, the better. Such formation must perhaps be promoted through tax, human capital, infrastructure, and capital markets policies, very much along the lines of traditional dual economy theories. From the perspective of economic growth, we should not expect much from the unofficial economy, and its millions of entrepreneurs, except to hope that it disappears over time. This “Walmart” theory of economic development receives quite a bit of support from firm level data."

Ideation Fashion said...

I don't think so.
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