The Emergent Fool

Micro-lending Is Not a Silver Bullet

Posted by kevindick in Economics, Poverty on December 6th, 2009 | View Comments

Tim Harford has a good analysis of the latest research on micro-lending’s effect on poverty. The basic result is that the near and medium term effects are extremely modest. This isn’t too surprising given the relative magnitudes of the intervention and the problem.

But there was always hope that a small perturbation could shift people to a better equilibrium. Alas, it looks like poverty is more robust. Now, there is evidently a lot of research in the pipeline that should tell us more soon. So maybe we’ll have better information for optimizing micro-lending in the future. But don’t expect a silver bullet.

Related posts:

Rafe Furst

"Can microfinance bankrupt entrepreneurs?" http://www.socialearth.org/can-microfinance-ban...
Matt Thompson

Mostly BS... Go to Bangledesh (I have 4 times), see how the money is used... my own observations showed out of 92 projects financed, 68 resulted in either a higher standard of living (albeit on a small scale) or the establishment of a new venture that had a reasonable chance of success of succeeding long term (thus raising the standard of living for the family/collective involved).

Stop reporting on others' intrepretations - go see for yourself (then form an opinion...)
kevindick

The first refuge of an ideologue is to reject systematic evidence for his limited first-hand experience.
Rafe Furst

Bangladesh = Grameen Bank (see caveat above).

Not sure how you can claim to understand how micro-finance has impacted other parts of the world any better than us. I can produce on-the-ground experts for you that back up my claims. I didn't just make them up.
Rafe Furst

I've heard a lot of criticism of the form: While Grameen did an incredible thing with lasting impact, MOST copycat applications (including Kiva) suffer from one of the following problems:

1) Bad intermediaries - e.g. Kiva relies on local partners to source and vet the debtors and to make sure they are in compliance, and to assure transparency in general.

2) Self-serving lending structure - Since microlending is at the core a for-profit business, and since there is no regulation or oversight required, and since most operations are in areas where there is little infrastructure and weak authority, many of the lenders are taking advantage of people who are looking for a life preserver.

Personally I am philosophically opposed to uncollateralized debt except to effect a regime change in attractor space from a poverty trap to an increasing returns environment. In other words, education and subsistence entrepreneurship. Other than that, equity should be used as it dominates from a game-theoretic perspective, and feels better from a human perspective :-)
Rafe Furst

That said, I should point out that I am not knocking Kiva, in fact I actively support them. I feel their problems are of the first type, not the second, and that on the whole they do way more good than harm.

But microlending is the first step in supporting micro-entrepreneurship, not the last word. For those who don't know what I'm talking about, see Paul Polack.