"Microcredit Is a Proven Weapon Against Poverty."
Alas, no. Microcredit, the strategy of lending sums as small as $100 to help poor people start tiny businesses, has won acclaim like few other recent concepts in economic development, winning plaudits from political leaders, titans of industry, and celebrities. Bill Clinton and Tony Blair love microcredit. So do Queen Rania and Natalie Portman. More than 100 million people in more than 100 countries have received microloans, thanks in no small part to billions of dollars from foreign aid agencies, philanthropists, and "social investors" looking to do well while doing good. In 2006, microcredit pioneer Muhammad Yunus and the Grameen Bank he founded in Bangladesh shared the Nobel Peace Prize. Microcredit has gained a global reputation for lifting people out of poverty and empowering women.
What has made so many so sure of microcredit? The ideas are powerful: a blend of self-reliance and liberation that appeals across the political spectrum. Microfinance promoters told compelling stories of individual men and women whose successes embodied those ideas, and papers in prestigious journals gave convincing evidence that the loans, especially when they went to women, made them less poor.
But the old studies are now discredited. Newer, better ones have found that microloans rarely make an impact on bottom-line indicators of poverty, such as how much a household spends each month and whether its children are in school.
The reversal of this academic verdict is a sign of a larger shift in development economics, toward randomizing in order to pin down cause and effect. If you observe that less-poor people are more likely to have taken microcredit, it is hard to know what caused what: Did the microcredit make them better off, or did being better off make them readier to borrow? If you instead flip a coin to decide who in a village will be offered microcredit and who will not -- randomizing -- and then observe that the fates of the two groups diverge over time, you can more accurately observe what effect the loans are having on those who receive them.
Recent randomized studies in India, Mongolia, Morocco, and the Philippines have found that access to microcredit does stimulate microbusiness start-ups -- raising chickens, say, or sewing saris. But across the 12-18 months over which progress was tracked, the loans did not reduce poverty. So today the best estimate of the impact of microcredit on poverty is zero. (In retrospect, reverse causation cannot be ruled out as the source of the more upbeat findings of earlier, nonrandomized studies.)
This finding clashes with the microcredit mythology. But it comports with common sense. If you're reading this article online, you probably belong to the global middle class, the billion or so people who earn steady wages and lead lives of material comfort. What in your family history lifted you to your enviable perch? It probably wasn't tiny loans to your indigent ancestors so they could raise goats. Then, as now, most poor people's best hope for escaping poverty lies in graduating from tenuous self-employment to steady employment -- to jobs, which are the fruit of industrialization.
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