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«Credit and Self-Employment Nidhiya Menon, Brandeis University Yana van der Meulen Rodgers, Rutgers University Version: May 9, 2011 Draft Chapter for ...»

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Credit and Self-Employment

Nidhiya Menon, Brandeis University

Yana van der Meulen Rodgers, Rutgers University

Version: May 9, 2011

Draft Chapter for Deborah M. Figart and Tonia Warnecke (eds.),

Handbook of Research on Gender and Economic Life

Contact Information: Nidhiya Menon, Department of Economics & IBS, MS 021, Brandeis

University, Waltham, MA 02454-9110. Tel 781-736-2230, fax 781-736-2269, email

nmenon@brandeis.edu. Yana van der Meulen Rodgers, Women’s and Gender Studies

Department, Rutgers University, New Brunswick, NJ 08901. Tel 732-932-9331, fax 732-932email yrodgers@rci.rutgers.edu.

I. Introduction Around the globe, small-scale entrepreneurship provides an important vehicle for income generation for women and men. Some people start microenterprises because they need or want more flexibility in their terms of employment, or they have innovative ideas that warrant starting a new business. Other people, often those at the lower end of the income scale, have little choice but to engage in self-employment when paid employment opportunities are scarce. A substantial proportion of the poor around the world rely on self-employment as a source of income as they navigate a host of constraints that include a lack of affordable loans from formal sources, restricted access to reliable savings accounts, few formal sources of insurance, insecure land rights, and insufficient public infrastructure such as piped water and electricity. Escobal (2001) documents that access to roads and personal assets such as education and credit are critical for diversification into non-farm sources of income generation such as self-employment.

Infrastructure and financial constraints can be particularly severe for rural areas in developing countries, where between 25 and 98 percent of households living in poverty report being selfemployed in agriculture.1 Moreover, self-employment allows parents, and especially mothers, to combine labor market participation with childcare responsibilities. Even though household businesses tend to be small, in their entirety, such business ventures can employ a large share of the labor force, especially in developing countries with burgeoning informal sectors.

A growing body of evidence indicates that an effective policy intervention in promoting self-employment is the provision of credit through small-scale loans that are mediated via rural banking reforms and microfinance initiatives. Such initiatives target individuals who have difficulty obtaining conventional loans through commercial banks. Without access to formal loans, these individuals have often had to rely on informal-sector money lenders and other expensive sources of credit. By offering a variety of pecuniary resources and financial services to the poor and the disenfranchised, both microfinance and rural banks have helped to lower poverty in a number of countries. In this way, increasing access to credit can promote income redistribution and macroeconomic growth.2 For example, India’s government initiated a rural social banking program following the nationalization of banks in 1969 that opened new bank branches in previously unbanked rural locations. This state-led expansion of the banking sector contributed to a statistically significant reduction in poverty in rural India.3 Moreover, Bangladesh’s innovative Grameen Bank – which targets the poor and uses peer selection and monitoring to replace traditional collateral requirements – has also been linked with lower poverty and improved well-being.4 Success stories associated with the Grameen Bank have in turn contributed to the proliferation of microfinance initiatives across countries and regions throughout the world. Also contributing to this surge in microfinance activity were other fairly small, independent programs in Latin America and South Asia during the 1970s. Since then, this movement has provided approximately 65 million low-income individuals around the globe with access to small loans without collateral and with opportunities to acquire assets and purchase insurance.5 Microfinance, in turn, has contributed to a substantial increase in self-employment activities world-wide.

The remainder of this chapter explores how women’s and men’s employment decisions respond to credit, with a particular focus on self-employment. The chapter also explores how new opportunities for women to engage in self-employment can have spillover effects within the household, especially for women’s bargaining power and the well-being of their children.

Understanding the reasons why women and men decide to engage in self-employment can help to develop new policies that better support workers and their families, stimulate employment generation in countries with rapid labor force growth, and promote innovative entrepreneurial activities.

II. Prevalence of Self-Employment Across regions, a substantial proportion of men and women engage in self-employment in order to support themselves and their families. Variations exist in self-employment rates across countries at different stages of development and with different institutional structures. To support this assertion, we performed a descriptive analysis of current self-employment shares across countries varying by region and income group. In this assessment, we constructed selfemployment shares for men and women using the International Labor Organization’s (ILO) published data on employment status across all regions. For a country to be selected for this comparison, it needed to report employment status data at some point during the 1999-2008 period, and it needed to report employment status separately for men and women. These criteria resulted in a sample of 129 countries. For each country, we chose the most recent year of employment status data available.6 Following the ILO definition, we classified as self-employed all individuals reported to be employers, own account workers, unpaid family workers, or members of producers' cooperatives.7 The self-employment share is thus self-employed individuals as a proportion of all employed individuals, and this share is constructed separately by gender. Finally, we grouped all countries according to four broad income groups: low-income economies, lower-middle-income economies, upper-middle-income economies, and high-income economies.8 The results of this descriptive analysis are presented in Figures 1-3.





Figure 1, Panel A shows that self-employment shares are generally very high in lowincome economies, especially in Sub-Saharan Africa. Moreover, in all countries but one (Kyrgyzstan), self-employment shares are noticeably higher for women than they are for men.

On average in low-income economies, 86 percent of women are self-employed, compared to 79 percent of men. The highest rates of self-employment are found in Sierra Leone and Tanzania, where 96 percent of women are self-employed. Panel B shows that the conclusion regarding a greater incidence of self-employment among women compared to men also holds for lowermiddle-income economies. However, the overall importance of self-employment as a source of employment declines markedly. On average, 52 percent of women and 46 percent of men in lower-middle-income economies are self-employed. Some of the highest rates of selfemployment in this group of countries are observed for women in Cameroon, Yemen, and Vietnam. Overall among lower-middle-income economies, self-employment constitutes a larger source of employment among African countries as compared to other regions.

–  –  –

As a specific example among the poorest developing countries, detailed household survey data for Nepal indicate that agricultural self-employment serves as the main source of employment for the vast majority of Nepal’s female labor force. In 2006, the most recent year for which the household data were available, more than three quarters of women workers in Nepal were engaged in agricultural self-employment.9 Another 8 percent of women workers had jobs as paid farm workers. Only a small proportion of the female work force (about 7 percent) worked in sales and services, with an even smaller percentage working as manual workers in the manufacturing sector. Moreover, about three quarters of working women in Nepal have no cash earnings at all. The dominance of unpaid agricultural self-employment and the limited opportunities for more remunerative work have been associated with Nepal’s persistent problems of high poverty rates and income inequality.10 As shown in Figure 2, self-employment shares are substantially lower in upper-middleincome economies relative to low-income and lower-middle-income economies, and they are also higher for men than for women. On average, 32 percent of men are self-employed in uppermiddle-income economies, compared to 29 percent of women. Among this group of countries, some of the highest rates of self-employment for men are found in Azerbaijan, Colombia, and the Dominican Republic, and for women in Azerbaijan, Iran, Algeria, and Peru. Among broad regions, self-employment rates tend to be higher among upper-middle-income economies in Asia and the Pacific, and while they tend to be lower in Africa and Europe.

–  –  –

Finally, self-employment shares take a noticeable step downward for the high-income economies (Figure 3). In addition, as in the upper-middle-income economies, men demonstrate a greater incidence of self-employment compared to women in the high-income economies. On average, 17 percent of men are self-employed, compared to just 10 percent of women. The variance across countries is also smaller among high-income economies compared to the other income groups, and only Korea and Greece have self-employment shares in excess of 30 percent.

Among the regional groups, high-income countries in the far western part of Asia (especially Kuwait, Qatar, and United Arab Emirates) have a very low incidence of self-employment.

–  –  –

These conclusions from the assessment of self-employment shares in the past decade are supported by earlier studies regarding general patterns in self-employment across countries at different stages of economic development. For example, using a sample of 64 developing countries and 19 industrialized countries from the 1960s to the 1990s, Pietrobelli et al. (2004) estimates a broadly negative relationship between self-employment and economic development.

That is, self-employment rates decline with industrialization. However, this result is qualified with the observation that in some countries, innovative forms of entrepreneurship arise as a consequence of the existence of export manufacturing industries with high value-added.

Moreover, primary education encourages self-employment whereas secondary education limits it. The authors argue that nothing conclusive can be said on the link between self-employment and economic and cultural factors such as financial sector development and women’s labor force participation rates.

Even within advanced countries such as the United States, self-employment rates are not uniformly distributed across the population. Fairlie and Meyer (1996) document very different self-employment rates among 60 ethnic and racial groups, and the differences persist even with controls for age, education, immigrant status, and time in the country. Further, the authors find that differences in self-employment rates are influenced by each ethnic/racial group’s differential between average self-employment and wage and salary earnings. In particular, the more advantaged ethnic/racial groups (as measured by income) have the highest rates of selfemployment. In another study of self-employment patterns in the United States, Lofstrom and Wang (2006) argue that among Hispanics, the most rapidly increasing ethnic group in the United States, self-employment rates are low among Mexican-Hispanics but not among Hispanics from other countries. Moreover, education and access to financial assets are crucial to explaining differences in entrepreneurship trends. A reason put forth for low rates of self-employment among Mexican-Hispanics is their low rate of entry into high-barrier industries such as finance, insurance, and other professional fields with high human capital requirements.

Previous studies have also supported the findings from the descriptive assessment in Figures 1-3 on gender differences in self-employment shares across lower- and higher-income economies. In particular, the proportion of working men who report being self-employed exceeds the proportion of working women who are self-employed in higher-income countries such as Canada, the United States, Australia, Israel, and much of Western Europe (McManus 2001). The consistency of lower self-employment rates for women as compared to men is striking given how different total self-employment rates are across these countries. McManus (2001) argues that a large part of the gender-differential in those reporting self-employment may be attributed to segregation in occupation, industry, and gender differences in business characteristics.

In addition to institutional factors, differences in self-employment rates by gender in higher-income countries may also be attributed to the manner in which individual workers react to various labor market characteristics. Using data from Germany, Georgellis and Wall (2004) finds that self-employment transition probabilities are influenced by the fact that men are more responsive to the wage differential between salaried employment and self-employed work. In addition, access to credit appears to be more binding for men as compared to women. The authors suggest that for women, self-employment appears to be a closer substitute for part-time work than it is for men.

In sum, within the population of self-employed workers, there are marked variations along gender lines. In contrast to higher-income countries, proportionately more women than men are self-employed in lower-income countries, with the implication that women have relatively less job security and more unstable incomes in these areas and thus turn to selfemployment as a means of overcoming such obstacles. Moreover, in lower-income countries, self-employment commonly takes the form of a household enterprise, and women-owned household enterprises are often smaller in scale than those owned by men. The next section addresses how improved access to credit may help to generate more income stability by increasing the scale and scope of household enterprises.



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