Forlorn hopes that capitalism can solve poverty

This blog has on a few occasions pricked the balloon of those who believed another type of approach by capitalism can solve poverty and deprivation. Much has been claimed about micro-credit and the efforts of such people as Yunus and the Grameen bank and the scores of emulators that followed and this blog has deflated much of their claims.  

Yet again another report has emerged casting doubts on the micro-banking panacea for poverty. Six studies from different parts of the world, published in the American Economic Journal: Applied Economics, all find that microcredit is not an effective tool at helping people escape poverty. The findings corroborate calls that microfinance advocates have oversold the benefits of providing loans to the world’s poor, especially women. Randomized control trials were used to determine what happened when people in Bosnia and Herzegovina, Ethiopia, India, Mexico, Mongolia, and Morocco took out microloans. They were conducted independently of one another and covered a total of 37,000 people. All six showed that loan recipients experienced “modest, but not transformative, improvement” in their lives.

 “One of the things that is interesting is how consistent the findings are, based on very different contexts and even quite different products,” said said Timothy Ogden, managing director of the Financial Access Initiative at NYU.

“These loans do help, but the changes are not transformative, certainly not transformative enough to justify charitable donations to the standard microcredit model. We have seen, though, that these are viable profit-making products, and so investors interested in a double-bottom line should take note,” said MIT economist Esther Duflo, co-author of two of the studies, in a news release.

The studies, conducted by researchers affiliated with Innovations for Poverty Action (IPA) and The Abdul Latif Jameel Poverty Action Lab (J-PAL), conclude that while microloans can increase small business ownership and investment, the small, short-term loans generally do not lead to increased income, investments in children's schooling, or substantial gains in women's empowerment for poor borrowers.

"The studies do not find clear evidence, or even much in the way of suggestive evidence, of reductions in poverty or substantial improvements in living standards. Nor is there robust evidence of improvements in social indicators," the introductory paper to the studies reads.

The micro-credit model will still continue despite the disappointing outcomes nevertheless. Lending of this type will still appeal to investors, Ogden said. While cash transfers have emerged as an alternative with significant impact, there are people and organizations looking to make a financial return on investment. That is something loans can provide as opposed to just giving people money. They may well tweak the process by allowing breaks for repayments, shorter loans, changing when loan cycles begin. No doubt charities and various NGOs will still promote such financial service practices as micro-credit, after all, they have to stay in existence themselves.