Skip to main content

Conditions necessary for Micro-credit to be a successful poverty reduction tool

 Poverty reduction remains a daunting task for policy makers’ world over. Out of quiver of many policies prescriptions available to policy makers is microcredit among the latest. However as it is noted by all the scholars worldwide that no single policy prescription is panacea  for reducing poverty and hence microcredit should be one of the policy prescription along with other in the poverty reduction programme.
                To make microcredit a successful poverty reduction tool we must use it simultaneously with other poverty reduction tools such as
1. Subsidised food grain distribution: Since poor people spend around 80 percent of their income on food and hence making available subsidised food grains will go a long way in increasing the purchasing power of the poor. This will further protect the poor from high market prices of food grains and will enable them to make prompt payment instalments to service their loans.
2. Skill development of poor people: Since poor people lack enough skills to make money out of the microcredit they receive and hence enabling poor to earn more income out of same amount of money which he could get hitherto. This will also make poor as good entrepreneur.
3. Reduce transaction cost and corruption: In underdeveloped countries, poor people spend more money to get benefit[1] of welfare schemes designed to benefit them. Sometimes high transaction cost even prevents them from accessing welfare schemes. (El-Ghonemy, 2007)This welfare trap keeps them in poverty trap because of high levels of transaction cost[2]. Hence reducing corruption and easing governance in these nations will surely help many poor get out of poverty.
4. Convergence of different pro-poor schemes: It was experience of Andhra Pradesh state of India that convergence of different government programmes can lead to better execution of schemes and more benefit to poor. This was done to converge all other manual labour requiring programme with MGNREGA, a job guarantee scheme. (NREGA website) (NABARD pdf report)Similarly, if input subsidy scheme can be merged with microcredit to help famers and self help groups then poor can get more benefit out of the micro credit and consequently come out of poverty soon.
Nevertheless, above mentioned programmes can enhance the effectiveness of microcredit but more important point for success of microcredit in poverty alleviation is to form a cohesive group and supervise properly to avoid diversion of credit to other activities[3].

Anonymous. (n.d.). Retrieved November 19, 2014, from NREGA:
Anonymous. (n.d.). Status of Microfinance in India 2012 – 2013 – NABARD pdf report. Retrieved November 18, 2014, from NABARD:
El-Ghonemy, M. R. (2007). The Crisis of Rural Poverty and Hunger: An Essay on the Complementarity between Market- and Government-led Land Refrom for its Resolutions. New York , USA: Routledge.

[1] Sometimes transaction cost exceeds benefit derived from the government progarmme leading to net loss to poor.
[2] Corruption is also a component of transaction cost.
[3] Possibility of consumption credit to stop diversion can hardly be denied. 


Popular posts from this blog

The Supermarket Revolution is a Two-Edged Sword

The SupermarketRevolution in Developing Countries Policies for “Competitiveness withInclusiveness”, an article by Thomas Reardon and Ashok Gulati discusses the impact on each segment. 1. Supermarkets are having benefits of scale economies and low cost structure due to their business model which they pass on to consumers in the form of lower prices of goods for no change in quality. Given the fact that food products constitutes major share of sales in supermarket and are having inelastic supply as well as demand, lower prices for same/similar quality goods provides higher satisfaction and welfare to consumers. This also benefits economy in fighting inflationary tendencies. 2. For retailers in unorganized sectors, the authors say that the share of the unorganized retailers declines at different rates in different countries. From the point of view of an economy this is a good signal because with increasing formal sector in economy it becomes easy for government to regulate markets, taxati…

Should national governments introduce minimum wages or should they leave it up to the market to decide on wages?

I support Market to determine wage rates. Facts and reasoning for justifying my point are following. Minimum wage laws were invented in Australia and New Zealand for purpose of guaranteeing the minimum standard of living for unskilled workers. Minimum wage laws can set the minimum wages but can’t guarantee job. In practice they are often set for low skilled workers. (Gorman) . The International Labour Office in Geneva, Switzerland reports that some 90% of countries around the world have legislation supporting a minimum wage. The minimum wage in countries that rank within the lowest 20% of the pay scale is less than $2 per day, or about $57 per month. The minimum wage in the countries that represent the highest 20% of the pay scale is about $40 per day, or about $1,185 per month. (Smith). For USA, Minimum wage in 1968 was $1.60 per hour while it was $7.21 per hour on a 1996 constant dollar scale and minimum wage in 1996 was $4.75 per hour. This shows that rise in minimum wages have not …