Employment, Not Microcredit, Is the Solution

Paper
Date Published: 
Jan 2007
Author: 
Karnani, A.
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How much do the poor really benefit from microcredit?

This paper argues that the vast majority of microcredit clients are caught in subsistence activities. With low skills, little capital and no scale economies, their businesses have low productivity and lead to meager earnings that cannot lift the owners out of poverty. Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. The paper states that:

  • Microcredit often yields non-economic benefits such as increasing self-esteem, social cohesion, and empowering women;
  • It helps the poor smooth consumption;
  • Some studies have found that microcredit has a negative impact on poverty - poor households simply become poorer through the additional burden of debt;
  • However, most studies suggest that microcredit is beneficial to a limited extent;
  • Most microcredit clients are not microentrepreneurs by choice and would gladly take a factory job at reasonable wages if possible;
  • Examples from China, Africa and India highlight the need for the development of the employment sector.

The paper concludes that rather than lending $200 to five hundred women so that each can buy a sewing machine and set up a micro-enterprise manufacturing garments, it is much better to lend $100,000 to an entrepreneur with managerial capabilities and business acumen and help her to set up a garment manufacturing business employing 500 people.

Type: 
Paper