Writing in an Asian Development Bank Working Paper (#812) Shu Cai, a Professor at Jinan University (et al.) takes a look at a specific example of microfinance in the PRC.
This study is important as in recent years the effectiveness of microfinance has been questioned. Studies elsewhere have shown either limited, insignificant or no effects on poverty alleviation.
In some cases these well-meaning interventions have led to greater inequality among the rural poor so a study that shows how the process can work, and work effectively, is noteworthy.
In China’s case the results were impressive. The research found “..being in a program village increases household income by 32% relative to the control mean,..”, moreover “..not only did greater access to credit substantially increase income of households in the treated villages, but also that the program reduced poverty by 18%, increased durable consumption by about 27%, and increased measures of subjective well-being.”
So what’s China’s secret sauce? How and why has their program been so effective? China’s scheme differed from others studied as it had:
- Larger loan sizes
- Less frequent repayment schedules
- Lower interest rates
- Less formal credit access before the program
- Higher returns from off-farm employment made possible by the schemes
The researchers missed out an important, and I think BIG explanatory variable. In China’s schemes money is allotted to a village as a lump sum and then local officials decide who can get it. Right there, at the grass-roots, there’s responsible gate-keeping and accountability.
I suspect the above has a lot to do with how productive the loans have been and, most important, recovery rates. Of course, few other countries have such a well developed command and control political system which may explain why these schemes have such a patchy success rate elsewhere?
You can read the paper in detail via the following link Microfinance Can Raise Incomes.
Happy Sunday.