A Sobering Look at Microcredit and Microenterprise

Randall Kempner, writing on the Harvard Business Review blog:

Development agencies have promoted microfinance — the provision of small financial loans to poor people — because it is supposed to help poor people move out of poverty. After a comprehensive review of existing studies, with particular focus on recent randomized control trials, [researcher David] Roodman says that just isn’t true. “On current evidence, the best estimate of the average impact of microcredit on the poverty of clients is zero,” he argues. . . .

Another reason for justifying microcredit is that it offers poor people, particularly women, greater control over their financial lives. Roodman says the evidence is mixed on that count too. Some women may have been empowered, but others have been forced to repay loans when it wasn’t best for them. Cross-collateralization groups become burdensome, not emancipating, and at their worst, they lead to situations where people rob from each other to pay off their debts.

The reference is to David Roodman’s 2011 book Due Diligence: An Impertinent Inquiry into Microfinance. I have written skeptically about microfinance in the past. While effective capital markets, including those for very small loans, are critical elements of a market economy, it is unclear that microlending per se matters much, and the current emphasis on microenterprise ignores the fact that, historically, economic development is typically driven by large-scale enterprise, capital accumulation, and scale economies, not indigenous small business.

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