Not Another Cure-All Pill for Poverty

Monday, June 25, 2007

The cover story of this summer?s Stanford Social Innovation Review hits like a bombshell: ?Microcredit Misses Its Mark.? For the development-savvy, pro-market reader, the claim seems out of line. In the long, spotty history of development aid, isn?t microfinance, with its emphasis on entrepreneurship, grassroots action, and individual responsibility, the one thing we can safely be proud of?

Well, yes and no, says author Aneel Karnani (of the University of Michigan?s Ross School of Business). Karnani grants that microfinance produces well-documented social benefits, particularly for women. But, he argues, it does not cure poverty. Stable jobs do.

Karnani?s illustration is simple and effective: Compare a microfinance program that lends $200 to each of 500 women, so that each can buy a sewing machine, to a $100,000 loan to a single garment manufacturer with 500 employees. Which scenario is likely to create the most wealth for the poor? In the first case, each of the 500 women must pay off a high-interest loan while competing against each other in the same market. The traditionally financed big business can exploit economies of scale and efficient organization to benefit owners and workers alike.

Fair enough. We shouldn?t romanticize the poor as entrepreneurs. Bedrock economic principles?such as economies of scale?still apply in the developing world, and access to credit alone does not impart the specialized skills and financial wherewithal that a successful microentrepreneur would need to grow her business. Plus, as Karnani notes, even in wealthy, well-educated countries, some 90% of the labor force are employees, not entrepreneurs.

Still, Karnani goes a bit too far when he claims that, to truly help the poorest of the poor, societies ?should stop investing in microfinance and start supporting large, labor-intensive industries.? To Karnani?s credit, he warns us that microfinance is not a pill for curing poverty. But he makes the mistake of trying to pick a different panacea. Haven?t development practitioners and economists been doing this for long enough? (For a potent critique of attempts to cure poverty over the years, see William Easterly?s The White Man?s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good.)

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Source: AMERICAN.COM (link opens in a new window)