Is Microcredit the Right Way to Help the Poor?

According to Rosenberg, most of the “evidence” for microcredit is flawed.   Anecdotes about entrepreneurs whose receipt of loans helped them out of poverty could be selected examples that do not represent what has happened to most recipients of microcredit. Moreover, most studies which show that people who received microcredit perform better than those who did not aren’t controlled experiments.  As Rosenberg rightly points out, people who receive microcredit might have skills or personalities that increase their receipt of credit and enhance their business outcomes.  Thus, the receipt of microcredit isn’t necessarily responsible for their success.

Rosenberg points out that there is very little of the kind of randomized experiments that we would need to know whether microcredit actually helps poor people. Moreover, the few studies that randomly give some people access to microcredit don’t show clear benefits to the receipt of microcredit.  In some of the studies, recipients don’t see their income or consumption increase. 

So, at present, we don’t actually have hard scientific evidence that the provision of microcredit helps micro entrepreneurs. 

You might be tempted to respond that there is no evidence that microcredit hurts entrepreneurs either.  So what’s the harm in providing these loans?  The worst that happens is that they do nothing except make the donors feel good.

Unfortunately, that philosophy ignores the concept of opportunity cost.  There’s not an unlimited supply of philanthropic dollars that can be used to help the poor in the developing world.  Therefore, money used to provide microcredit comes at the expense of money used to help the developing world’s poor in other ways.  Microloans might mean fewer dollars for maternal health care or clean drinking water. 

In short, if microcredit doesn’t help micro entrepreneurs, we need to think seriously about whether we would be better off putting philanthropic dollars towards something else.

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