Paper

Can Micro-Credit Bring Development?

How does microsaving support the long-term effects of microcredit?
Download 41 pages

This paper uses a modified version of the occupational choice model to examine the long-term effects of microcredit.

Microcredit opens up self-employment opportunities to those who could otherwise only work for wages or subsist. The paper finds that microcredit:

  • Raises or lowers long-run GDP, since it can lower use of both subsistence and full scale industrial technologies;
  • Lowers long-run inequality and poverty by making subsistence payoffs less widespread;
  • Lowers output per capita and raises poverty in the long run in some cases.

The paper finds that the key to microcredit's long-run effects is the “"graduation rate”" or the rate at which self-employed individuals build enough wealth to start full-scale firms. It distinguishes between “"winner”" graduation (due to super-normal returns) and "“saver"” graduation (due to accumulation of normal returns) and states that “winner” graduation cannot bring about long-run development.

In contrast, given adequately high saving rate and normal returns in self-employment, microcredit can lift an economy from stagnation to full development via “saver” graduation. The lasting effects of microcredit may thus partially depend on simultaneous facilitation of micro-saving.

About this Publication

By Ahlin, C., Jiang, N.
Published