Can Micro-Credit Bring Development?
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.
