Nitin Rao

Not Another Cure-All Pill for Poverty

MicrofinanceJosh Weissburg, a Project Associate at The Aspen Institute has shared his perspective on Prof. Aneel Karnani’s SSIR article ?Microcredit Misses Its Mark”. He argues that the poor need options, not prescriptions.

Josh acknowledges merit in Prof. Aneel Karnani’s article that 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. Also, even in wealthy, well-educated countries, some 90% of the labor force are employees, not entrepreneurs.According to him, while Karnani makes valid points on the flaws in microfinance–he is making the mistake of trying to pick a different panacea: ?supporting large, labor-intensive industries.? In addition, he points out that local entrepreneurs carry the advantage of local knowledge that is hard for established players to come by in new markets.

Josh writes:

?Rather than continue on the seesaw of one faddish cure after another, policymakers, economists, and development practitioners should work to maximize access to a wide range of financial and economic options: steady factory jobs for those who want them, credit for those who opt to start their own business, not to mention developing-economy versions of the many other financial tools enjoyed in the developed world, such as insurance. The empowering virtue of the market is that when people have access to the tools they need to gain entry, they can find their own way.?

It appears to me that the microfinance industry–as has happened with many sectors–is in a phase where it is either seen as a panacea to all evils or cruel disguised death knell of debt. Undoubtedly, there is a surge of exuberance about microfinance–but as with any other instrument of credit, it is only as useful as the client makes it.

The question is: Do we believe that the poor, through choice and access, are capable of making decisions in their best interest?