Does Microlending Solve Poverty?
Acton Institute Powerblog

Does Microlending Solve Poverty?

microloans240wIf you give a man a fish you feed him for a day, but if teach a man to fish, you feed him for a lifetime. But what if a man knows how to fish but can’t afford a fishing pole? Or what if he knows how to sew but can’t afford a sewing machine? Can farm, but lacks a plow?

The recognition that some people have skills to make themselves self-sufficient but lack capital to buy the tools they need to support themselves was one of the motivations for the microlending movement.

In the early 1980s Muhammad Yunus, a Bangladeshi economist and social entrepreneur, began a project in which he used his own money to deliver small loans at low-interest rates to the rural poor. He later founded Grameen Bank to extend microlending to other communities in Bangladesh. In 2006 Yunus and Grameen Bank won the Nobel Peace Prize “for their efforts to create economic and social development from below.”

For free market advocates like me, this sounded like an ideal poverty-fighting initiative. Indeed, for about ten years I’ve been a funder of Kiva, a non-profit microlending network. I’ve always liked the idea that I was able to play the role of a small-scale venture capitalist, funding entrepreneurs in developing countries.

But in my zeal to help I never bothered to ask, “Does it work? Does microlending really help people escape poverty?”

Unfortunately, the answer appears to be “no.” A study that includes six randomized evaluations of microcredit finds a “consistent pattern of modestly positive, but not transformative, effects.” As Ben Casselman explains,

The studies find no evidence that borrowers are, on average, hurt by the loans. But they don’t appear to be helped much either. In a paper introducing the six randomized studies, economists Abhijit Banerjee, Dean Karlan and Jonathan Zinman walked through the findings: None of the six studies found statistically significant increases in household income or spending. Four of the six found no change in food consumption; one found a modest increase and the sixth found a significant decrease.

Some of the studies did find ancillary benefits. Borrowers got more of their income from their businesses, suggesting that they displaced other sources of income such as wages or government benefits. Those businesses also appear to have become more profitable. But the studies didn’t find any significant increases in school attendance or women’s empowerment in local communities, two commonly cited benefits of microcredit. The findings echoed those of earlier studies that also revealed minimal impacts.

“The takeaway is that there is not much of an effect,” said Esther Duflo, a Massachusetts Institute of Technology economist who was a co-author of one of the studies. “It doesn’t lead to the massive transformation in their quality of life. That’s not to mean that it’s useless, certainly not to mean that it’s hurtful … [but] it’s not the life-changing tool that it was presented to be.”

Because microlending can be of some benefit, I’ll likely keep funding small businesses in the developing world. Knowing about this evidence, though, has helped me to appreciate how I can be blinded by my own biases. I firmly believe that access to markets is an effective way to help the poor. But because of that belief, I naively assumed that almost anything that increases such access must therefore relieve poverty.

Conservatives like me tend to mock progressives who believe that good intentions are sufficient. I realize I should be more careful that I don’t fall into the same lazy thinking. The limited effectiveness of microlending has definitely shown me that, when it comes to fighting poverty, my own good intentions aren’t enough either.

Joe Carter

Joe Carter is a Senior Editor at the Acton Institute. Joe also serves as an editor at the The Gospel Coalition, a communications specialist for the Ethics and Religious Liberty Commission of the Southern Baptist Convention, and as an adjunct professor of journalism at Patrick Henry College. He is the editor of the NIV Lifehacks Bible and co-author of How to Argue like Jesus: Learning Persuasion from History's Greatest Communicator (Crossway).