The argument for microfinance is by making small loans to poor women in developing countries it will help them start businesses and escape poverty. Economists at the Massachusetts Institute of Technology, led by Esther Duflo, studied the effects of microfinance with randomized control trials, the same way medical researchers test whether a new drug works better than a placebo. The paper claims to be the longest evaluation of microlending.
After three years, they found that the average business is still small and not very profitable. Average levels of consumption, taken as a proxy for overall welfare, didn’t change, nor did development measures such as health, education, or women’s empowerment.
The paper concludes:
“For those who choose to borrow, while microcredit ‘succeeds’ in leading some of them to expanding their businesses (or choose to start a female-owned business), it does not fuel an escape from poverty based on those small businesses. Business profit does not increase for the vast majority of businesses, although there are significant increases in the upper tail. This study took place in a dynamic urban environment, in a context of very high growth. Microcredit seems to have played very little part in it.”
It suggests that small loans to help poor people become micro-entrepreneurs don’t alleviate poverty.
A new study by economists suggests that the best way to fight global poverty is simply to give people cash and let them spend it however they want. Likewise, a study from Innovations for Poverty Action, a non-profit research organization, by economists at Harvard and from MIT found that cash transfers of $300 or $1,100 to 500 poor Kenyan families helped reduce hunger, improve living conditions and increase investment in livestock and small businesses. They found that families ate 20 percent more food, increased the livestock they owned by 51 percent and were measurably happier and less stressed. The transfers did not lead to higher spending on alcohol and tobacco. These studies all suggest that if you give poor people money they’ll use it to make themselves a little better off which is scarcely ground-breaking research.
On the other hand, the study found “little to no impact” on education and health. The study indicates that cash transfer programs are not a cure-all, either.