Op-Ed: Microeffect of Microfinance

A recent article in the New Yorker echoed sentiments expressed by many venture capitalists that have begun to shift their focus on the developing world and BoP markets that microfinance, while an amazing concept for enable entrepreneurs, cannot in itself lift countries out of poverty. James Surowiecki writes:

Microloans are often used to “smooth consumption”—tiding a borrower over in times of crisis. They’re also, as Karol Boudreaux and Tyler Cowen point out in a recent paper, often used for non-business expenses, such as a child’s education. It’s less common to find them used to fund major business expansions or to hire new employees … [I]t’s also because most microbusinesses aren’t looking to take on more workers. The vast majority have only one paid employee: the owner.

I agree with this opinion, particularly because I think that the current obsession with the ‘globalizationally’ sexy structure of microfinance tends to ignore the need for the creation of domestic consumption demand in struggling nations to jumpstart development.

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