Boudreaux and Cowen on microcredit

economics ▪ microfinance ▪ policy ▪

Karol Boudreaux and Tyler Cowen ask the following on microcredit:

But can microcredit achieve the massive changes its proponents claim? Is it the solution to poverty in the developing world, or something more ­modest—­a way to empower the poor, particularly poor women, with some control over their lives and their ­assets?

and conclude that, more often, it's the latter:

Microcredit is making people’s lives better around the world. But for the most part, it is not pulling them out of poverty. It is hard to find entrepreneurs who start with these tiny loans and graduate to run commercial empires...[Microcredit] is important even when it does nothing more than stave off ­decline.

With microcredit, life becomes more bearable and easier to manage. The improvements may not show up as an explicit return on investment, but the benefits are very real. If a poor family is able to keep a child in school, send someone to a clinic, or build up more secure savings, its ­well-­being improves, if only marginally.

I agree: A lot of the benefits of microcredit programs come from the "consumption support" function that allows poorest households to smooth consumption (as well as human-capital investment in their children's education) during bad times. Unfortunately, many still don't appreciate this function of microcredits. One World Bank Jakarta official once told me how he could not convince a forum of local NGOs and donor agencies not to require microloans be used for "productive activities" in a microcredit program they were considering. An instance of policymaker paternalism, perhaps?