Can the expansion of microfinance add up to macro impacts?

The most basic question is the micro one: whether microfinance typically yields notable impacts on the lives of low-income families. The logical follow-on is, to the extent that micro impacts emerge, how do those impacts
add up? Is there a reasonable case that expanding microfinance can make a dent in regional or national economic growth rates? In national-level poverty rates?

There are two complementary research strategies. One is cross-country research, which tends to show positive correlations between financial expansion and the reduction of inequality (Demirgüç-Kunt and Levine 2009 provide an overview). The work doesn’t connect the dots from microfinance explicitly, but it does help frame issues. The second approach connects the dots by imposing structure on the relationships. A good example is the general equilibrium analysis of Buera, Kaboski, and Shin (2011). They find that increasing financial access leads to macro impacts, but the magnitudes are small.

The work will be more meaningful as the penetration of finance expands to include more of today’s unbanked population. As that happens, it will become more pressing to begin sorting out what this all adds up to.

The series has been compiled as a framing note on the FAI site and will later be published as part of a collection of studies in a forthcoming book.