The Micromagic of Microcredit

Via Delong, Karol Boudreaux and Tyler Cowen in The Wilson Quarterly:

On the charitable side, part of microcredit’s appeal lies in the fact that the lending institutions can fund themselves once they are launched. Pierre Omidyar, the founder of eBay, explains that you can begin by investing $60 billion in the world’s poorest people,   “and then you’re done!”

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?

On trips to Africa and India we have talked to lenders, borrowers, and other poor people to try to understand the role microcredit plays in their lives. We met people like Stadile Menthe in Botswana. Menthe is, in many ways, the classic borrower. A single mother with little formal education, she borrowed money to expand the small grocery store she runs on a dusty road on the outskirts of Botswana’s capital city, Gaborone. Menthe’s store has done well, and she has expanded into the lucrative business of selling phone cards. In fact,     she’s been successful enough that she has built two rental homes next to her store. She has diversified her income and made a better life for herself and her daughter. But how many borrowers are like Menthe? In our judgment, she is the exception, not the norm. Yes, microcredit is mostly a good thing. Very often it helps keep borrowers from even greater     catastrophes, but only rarely does it enable them to climb out of ­poverty.