Economists demonstrate wage impacts of large microfinance program

Jul 17, 2012

A major argument in favor of microfinance is that the poor who live in areas without banking services will gain higher returns on investments and increase their assets when provided with credit.

But a notable new study from the on Financial Systems and Poverty presents some of the first real evidence of microfinance impacts and indicates that the true returns of expanding access to credit are much more complex. Some of the greatest benefits to alleviating poverty, the study suggests, may be in the impact the programs have on driving up .

The research, by Joseph P. Kaboski of the University of Notre Dame and Robert M. Townsend of the Massachusetts Institute of Technology, examined changes in behavior resulting from the Thai Million Baht Fund. This initiative by the government in Thailand transferred one million Thai baht (about $24,000 at the time) to each of 77,000 villages throughout the country. The goal was to increase available credit and stimulate the economy. The findings were published earlier this year in the journal Applied Economics.

The CFSP study found that the village fund had the desired effect of increasing overall credit in the economy, and, in fact, in the long run, the program led to an overall expansion of credit. More significant, the authors argue, is that that wages increased by approximately 7% in a typically-sized village during the first two years that were tracked.

"This paper is the first real evidence we have on wage impacts of microfinance," notes Kaboski. "The impact on wages is important in terms of the potential of microfinance as a program. Only a relatively small fraction of the poor want to borrow from , but a much greater share of the poor work, and might therefore benefit indirectly from an increase in wages. We are far from understanding the mechanisms, but there is great potential here."

The authors suggest that the wage impacts may be because the fund led to a more efficient distribution of capital to entrepreneurs, which then increased the demand for labor. The study recorded that the wages increased for general non-agricultural labor, such as construction in the villages, but not for professional occupations or occupations outside of the village.

Additionally, the study showed, other effects of the injection of credit were more short-lived, including a notable jump in consumption, and increases in borrowing, business and labor income, and investment in agriculture.

The authors report that further examination of the data is underway. Their findings are based on an economic model they developed, using data captured as part of the Townsend Thai Data project, a monthly household panel survey that Townsend has led since 1997.

The paper, "The Impacts of Credit on Village Economies," was published in the journal earlier this year.

Explore further: The unexpected benefits of adjustable rate mortgages

Provided by Consortium on Financial Systems & Poverty

5 /5 (1 vote)
add to favorites email to friend print save as pdf

Related Stories

Microfinance programs: Benefits not clear-cut, study shows

May 11, 2012

(Phys.org) -- Large-scale microfinance programs are widely used as a tool to fight poverty in developing countries, but a recent study by University of Notre Dame Economics Professor Joseph Kaboski and MIT colleague Robert ...

The wealth of Thai villages

Apr 24, 2012

Examining Thai villages as smaller versions of a national economy provides a new understanding of the dynamics of economic growth and yields fresh insights to the financial lives of villages and households.

Recommended for you

Insider trading study shows stronger enforcement

1 hour ago

The first major study of the enforcement of Australia's insider trading laws has shown the number of insider trading cases brought by the Australian Securities and Investment Commission (ASIC) is increasing, ...

The unexpected benefits of adjustable rate mortgages

20 hours ago

Using loan level data matched to consumer credit records, researchers have been able to determine that a reduction in mortgage payments of as little as $150 a month spurred a reduction in mortgage defaults and an increase ...

Migrant employment on the rise

Oct 20, 2014

Skilled migrants are enjoying better jobs and higher levels of employment thanks to a shift in policy, according to a new study by the Melbourne Institute of Applied Economic and Social Research at the University ...

User comments : 1

Adjust slider to filter visible comments by rank

Display comments: newest first

Vendicar_Decarian
not rated yet Jul 17, 2012
Conservative Economists seek to bring to the rest of the world the borrow and spend disaster that they engineered for America.