The Mysterious Disappearance of Poverty

Tuesday, March 17, 2015

How do you help the poor? It is a very old question. The Roman emperor Nero found the answer in the advice of Stoic philosophers like Seneca, and built an awe-inspiring palace covered in gold leaf. This would fill the lower classes with gratitude for being blessed with such a glorious leader. Perhaps not coincidentally, the Roman senate ended Nero’s reign by ordering him to commit suicide four years later.

In the 21st century, our answers are not much better than Nero’s. This is once again obvious, as theAmerican Economic Journal: Applied Economicsrecently published six studies looking at the impact of microfinance on poverty.

Microfinance has been hailed as a panacea for the world’s poor. The Bangladeshi economist Muhammad Yunus popularized the practice of providing very small loans, without collateral, in order to support entrepreneurship and alleviate the more insidious effects of extreme poverty. The idea quickly spread around the world. There are now more than 10,000 microcredit organizations, providing 75 million borrowers with loans totalling more than US$38 billion.

In awarding Yunus the Nobel Peace Prize in 2006, the Nobel committee lauded “the important liberating force” and its major role in ending poverty. Unfortunately, it turns out this was wrong. The six independent reports, covering multiple countries and more than 37,000 people, all agreed: It is not especially effective.

Reconsidering the idea in hindsight, maybe this should have been obvious. For the poorest, income can be very erratic. A microloan will ensure your kids eat this month, even though you did not sell any vegetables at the local market. But it won’t allow you to lease more land or buy a canning machine. It won’t help you move up the economic ladder. It is a palliative. Microfinance treats the symptoms of poverty; it is not a cure.

But, on those merits alone, it is still a worthwhile endeavour. Even the most basic banking services are needed, and microfinance does make poverty less painful. At the very least, it does not hurt, unlike countless other “answers” to poverty, which turned out to be even more counterproductive than Nero’s Golden Palace.

Source: Maclean's (link opens in a new window)

financial inclusion, microfinance, poverty alleviation