Micro-credit, financial access, and growth

Professor Timothy Besley, London School of Economics and Political Science

Research Councils UK project page

There is a well-established link between financial market development and growth rates at the aggregate level. Economists working on financial markets in developing countries have also investigated extensively how financial arrangements affect households and businesses. Particular attention has been paid to how contracting and market frictions caused by transactions costs and informational constraints may limit borrowing opportunities for the poor, and can even lead to poverty traps.

However, our understanding of the link between the micro and macro pictures remains limited. Policy makers and NGOs, particularly in the guise of micro-finance institutions (MFIs), are squarely behind the need to extend finance as a means of raising productivity and fostering institutional change, particularly to increase entrepreneurship and growth in low-income environments. However, for such strategies to flourish and to be effective, they need the tools to understand the impact of alternative strategies for extending credit.

The focus of the research is on understanding how technologies which improve credit access affect productivity and welfare. The approach will focus on how the wealth and productivity distribution among actual and potential entrepreneurs affects take-up of finance in different environments including, for example, how competition affects outcomes. It provides a vehicle for understanding the links between financial contracts on the ground and aggregate outcomes as well a means of interpreting the results from evaluation studies. The model that we propose can be calibrated to the data using a range of empirical estimates.