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Can micro-credit bring development?

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  • Ahlin, Christian
  • Jiang, Neville
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    Abstract

    We examine the long-run effects of micro-credit on development in an occupational choice model similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. Thus, an equity-efficiency tradeoff may be involved in the promotion of micro-credit. However, in a worst case scenario, micro-credit has purely negative long-run effects. The key to micro-credit's long-run effects is found to be the "graduation rate", defined as the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: "winner" graduation (of those who earn above-average returns in self-employment) and "saver" graduation (due to gradual accumulation of average returns in self-employment). Long-run development is not attainable via micro-credit if "winner" graduation is the sole avenue for graduation. In contrast, if the saving rate and self-employment returns of the average micro-borrower are jointly high enough, then micro-credit can bring an economy from stagnation to full development through "saver" graduation. Thus the lasting effects of micro-credit may partially depend on simultaneous facilitation of micro-saving. Eventual graduation of the average borrower, rather than indefinite retention, should be the goal of micro-banks if micro-credit is to be a stepping stone to broad-based development rather than at best an anti-poverty tool.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Development Economics.

    Volume (Year): 86 (2008)
    Issue (Month): 1 (April)
    Pages: 1-21

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    Handle: RePEc:eee:deveco:v:86:y:2008:i:1:p:1-21

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    Web page: http://www.elsevier.com/locate/devec

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    Cited by:
    1. Dalla Pellegrina, Lucia, 2011. "Microfinance and Investment: A Comparison with Bank and Informal Lending," World Development, Elsevier, vol. 39(6), pages 882-897, June.
    2. Christian Ahlin, 2010. "Matching for Credit: Risk and Diversification in Thai Microcredit Groups," Working Papers id:2588, eSocialSciences.
    3. Asadul Islam, 2011. "Medium- and Long-Term Participation in Microcredit: An Evaluation Using a New Panel Dataset from Bangladesh," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 93(3), pages 843-862.
    4. Yusupov, Nurmukhammad, 2012. "Microcredit and development in an occupational choice model," Economics Letters, Elsevier, vol. 117(3), pages 820-823.
    5. Thiemo Fetzer & Maitreesh Ghatak & Jonathan de Quidt, 2013. "Group Lending Without Joint Liability," STICERD - Economic Organisation and Public Policy Discussion Papers Series 44, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    6. Swain, Ranjula Bali & Varghese, Adel, 2009. "Does Self Help Group Participation Lead to Asset Creation?," World Development, Elsevier, vol. 37(10), pages 1674-1682, October.
    7. Hisako, KAI & Shigeyuki, HAMORI, 2009. "Microfinance and Inequality," MPRA Paper 17537, University Library of Munich, Germany.
    8. Koen Rossel-Cambier, 2012. "Can Combined Microfinance Boost Economic Results? An Empirical Cross-sectional Analysis," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 79-94, August.
    9. Quibria, M.G., 2012. "Microcredit and Poverty Alleviation: Can microcredit close the deal?," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    10. Ojo, Marianne, 2013. "Role of regulation in micro finance: jurisdictional analysis," MPRA Paper 49927, University Library of Munich, Germany.
    11. Marianne, Roedl, 2013. "Role of regulation and micro finance in Africa, Asia and Latin America," MPRA Paper 51177, University Library of Munich, Germany.
    12. Deininger, Klaus & Liu, Yanyan, 2009. "Longer-term economic impacts of self-help groups in india," Policy Research Working Paper Series 4886, The World Bank.
    13. Martijn Boermans & Daan Willebrands, 2012. "Financial constraints, risk taking and firm performance: Recent evidence from microfinance clients in Tanzania," DNB Working Papers 358, Netherlands Central Bank, Research Department.
    14. Ahlin, Christian & Lin, Jocelyn & Maio, Michael, 2011. "Where does microfinance flourish? Microfinance institution performance in macroeconomic context," Journal of Development Economics, Elsevier, vol. 95(2), pages 105-120, July.

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