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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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III. Access to Credit and Self-Employment In developing countries especially, conventional sources of employment entail unstable income streams and no job security. Moreover, such livelihoods often remain uncovered by formal sector labor regulations. A key area of policy intervention to mitigate these risks is the provision of small-scale loans, especially to women, through microfinance and rural banks, in order to stimulate entrepreneurship. Providing greater access to credit in order to finance selfemployment activities can be particularly beneficial in regions with limited paid-employment opportunities for women due to labor markets characterized by discrimination, imperfect information, or insufficient labor demand.11 In these contexts, employment in home-based enterprises can reduce women’s vulnerability, providing them with earnings potential and improving their social security and that of their households. When women do face constraints in finding sufficient opportunities for wage employment, they may be willing to borrow in order to start their own small business or to increase the scale of an existing microenterprise.

In the case of rural households in poor countries, a high proportion of women workers has little formal schooling and is restricted in their geographic mobility. In such a scenario, women are likely to be self-employed in agriculture or in “female” trades such as spinners, weavers, and makers of tobacco products, which tend to be small-scale and only marginally profitable. In this context, improved access to credit can provide the opportunity for women workers to move up the ladder of self-employment activities and to undertake more profitable work in larger-scale operations, thus facilitating the move toward poverty reduction.

Previous research suggests that the targeted use of small loans can support and incentivize women’s labor market activities and promote economic welfare. As the first microfinance program of its kind, Bangladesh’s Grameen Bank has been the subject of numerous studies that have generally found positive results. For example, Pitt and Khandker (1998) found that credit given to women participants through the Grameen Bank had a strong positive effect on women’s labor supply, while income effects associated with the increased supply of credit reduced men’s labor supply. Impacts of the same direction but smaller in magnitude were found for two other group-based lending programs in Bangladesh: the Bangladesh Rural Advancement Committee (BRAC) and the Bangladesh Rural Development Board’s (BRDB) RD-12 program.

Also assessing the impact of Bangladesh’s largest microfinance programs, Hashemi et al. (1996) concluded that loan recipients used the credit primarily for self-employment in small-scale activities ranging from animal husbandry to artisan crafts. Women reported that the credit they received helped to increase their control over finances, improve their economic and social standing, and raise their productivity in both paid and unpaid work. Other research has shown that credit and non-credit services made available by participation in Grameen programs has contributed to positive profits from self-employment in Bangladesh, and that the presence of village-level microfinance has boosted asset growth and occupational mobility in Thailand.12 Another important example is India’s rural social banking program, which focused primarily on opening new bank branches in previously unbanked rural locations. Evidence in Menon and Rodgers (2011a) indicates that India’s rural banking reform program increased the likelihood of women engaging in gainful self-employment beyond unpaid family work, while having little effect on men’s self-employment work as own-account workers. A likely explanation is that women have restricted access to formal employment in developing countries such as India, so when a household obtains a loan, it is rational for women to become selfemployed and to earn a livelihood from their own trade or home-based business. These conclusions are supported with a recent study on women’s mobility in India suggesting that historically disadvantaged groups are more likely to respond to new economic opportunities.13 Moreover, the increase in women’s self-employment in India’s rural sector appears to have occurred in more productive economic activities. Menon and Rodgers (2011a) report that increased access to credit facilitated the shift of women workers out of cultivation into other entrepreneurial activities, including more capital-intensive livestock and dairy farming. Between 1983 and 2000, the proportion of women with credit who were employed as dairy and livestock farmers rose from about 25 percent in 1983 to 28 percent in 2000. These results concur with findings in Ramkumar et al. (2004) showing that women would rather be engaged in selfemployment as cattle herders and dairy farmers as opposed to working in agricultural cultivation.

They preferred self-employment in herding and dairy because it provided stronger financial security, gave the women more autonomy, allowed for a more flexible working schedule, and was physically less arduous. More broadly, the move into more productive economic activities was one possible channel through which India’s social banking program worked to reduce poverty. In support of this argument, Lanjouw and Murgai (2009) find that diversification of economic activities in India’s rural sector, and the growth of non-farm employment including other types of self-employment endeavors, contributed to poverty reduction. Furthermore, the growth of non-farm employment placed upward pressure on agricultural wages, which had additional beneficial spillover effects on poverty reduction in the rural sector.





The importance of credit in encouraging self-employment is also evident from studies in higher-income countries. Evans and Jovanovic (1989) develop and test a model of entrepreneurial choice using data from the United States to show that capital constraints play a role in limiting entrepreneurship, and that conditional on education, experience, and demographic characteristics, the effect of assets on the likelihood of initiating a business is positive. Using information on windfall gains from the Swedish lottery and inheritances, Lindh and Ohlsson (1996) find that the decision to become self-employed is curtailed by access to credit, and that the probability of becoming self-employed increases for recipients of lottery winnings and unanticipated inheritances. For Swedish women, the probability of selfemployment is in general lower as compared to men. The study does not provide adequate information to answer whether the probability of self-employment increases more for women recipients of lottery winnings or inheritances, as compared to their male counterparts. Taylor (2001) implements a comparable study for Britain and provides additional evidence that relaxing liquidity constraints can increase self-employment probabilities. Using lottery and inheritance data is a clever way to circumvent problems of self-selection that plague credit evaluation studies, since those who choose to take credit may be systematically different from those who do not.14 Providing further evidence on the liquidity constraints that stand in the way of selfemployment, Lindh and Ohlsson (1998) argue that self-employment rates should be higher in countries where the distribution of income is more unequal, because the number of people who are able to provide collateral for loans is higher in populations with unequal income distributions. This argument is supported with data from Sweden. These results have implications for gender-differentiated distributions of income within industrialized countries and for the higher self-employment shares for men as compared to women. One possible explanation is that within an unequal income distribution, women tend to be at the lower end of the distribution whereas men are more likely to be at the higher end.

Not all previous research, however, has shined a favorable light on credit expansion, especially as embodied in microfinance and the widespread delivery of small-scale loans. Some have argued that because most microfinance schemes are not public programs, the proliferation of microfinance has shifted the burden of poverty reduction away from governments to the poor themselves (especially women). Moreover, the small loans provided by microfinance programs can act like a trap that prevents women entrepreneurs from raising their income levels beyond the poverty threshold. Critics also argue that microfinance has become a magnet for large financial-sector firms, who view the relatively high interest rates as profitable. This development can signal hardship for the poor and subvert the intended goal of poverty reduction.15 Some of this criticism may be context-specific, as other studies have shown that even high interest consumer loans lead to improved welfare. For example, using data from South Africa, Karlan and Zinman (2010) show that individuals who borrowed consumer credit at rates as high as 200 per cent per annum, benefitted from doing so as compared to their next best alternative.

Others have argued that women’s self-employment may be less responsive to new credit sources as compared to men. For example, de Mel et al. (2008) demonstrated that small grants in the form of cash or in-kind support given to a randomly-selected group of small businesses in Sri Lanka resulted in high rates of return for men, on the order of about 5 percent per month.

Women-owned microenterprises, however, had rates of return that were essentially zero.

Moreover, group-lending programs for women in Northeast Thailand examined by Coleman (1999) had no statistically significant impact on indicators of economic activity that included production, sales, and time spent working. Furthermore, Kevane and Wydick (2001) showed that women entrepreneurs who borrowed from microenterprise lending institutions did not create new employment with their businesses as compared to other entrepreneurs. Finally, McKenzie’s (2009) assessment of microenterprises and finance in developing countries concluded that simply providing greater access to capital is not sufficient to help microenterprises grow. Rather, additional policies that improve business training, offer business-development services, and assist in the shift toward more profitable activities, were most effective in strengthening the impact of credit on microenterprises.

The argument that credit alone is not enough to stimulate productive self-employment is not new. A well-known counter example is the Self Employed Women’s Association (SEWA) of India, a trade union for self-employed women from poor households that was founded in 1972.

One of SEWA’s main objectives has been to empower self-employed women through increased organization of individual disenfranchised women. Although savings and credit groups have played an integral role in SEWA’s functions, SEWA has also provided services related to housing, trade, education, skill development, entrepreneurship training, political activism, and general insurance as well as community based health insurance. SEWA increases the productivity of its members by providing integrated services that connect important aspects of business creation such as training, capital, and access to markets. For example, in addition to providing know-how on occupations as varied as dairy farming and handicrafts, SEWA also provides support services in infrastructure development financed through micro-loans and disaster rehabilitation and relief.16 One motivation for why SEWA moved to providing interspersed services was because the organization’s clientele was composed of poor women who had multiple occupations in the informal sector. That is, women in the informal economy are often forced to take up more than one job in order to generate sufficient income. Thus, the provision of integrated services generated more value-added for such women who were not specialized. SEWA has gained the support of major multilateral agencies and donors given its broad-ranging impact on women’s empowerment and poverty reduction.17 Other studies have also de-emphasized the role of credit in furthering self-employment, and they have stressed the importance of alternative determinants such as human capital. In a study of inter-generational links in self-employment using data from the United States, Dunn and Holtz-Eakin (1996) find that although financial assets of young men do exert a significant effect on the probability of being self-employed, the magnitude of the effect is quantitatively small.

What appears to matter most is parent’s human capital in self-employment, with father’s experience in self-employment having the largest impact.

Finally, reforms that enable increased asset ownership could have implications for selfemployment, even though they might not work by directly improving access to credit in the short run. For example, Do and Iyer (2008) examine the economic impact of the 1993 Land Law of Vietnam which created a land market by giving households the power to exchange, lease, and mortgage their land use rights. Using variation in the speed of implementation of the reform to identify effects, the authors find that as a consequence of the additional land rights, households increased their labor in non-farm work. However, since household borrowing did not exhibit much variation during the period of analysis (1993-1998), these effects are attributed mainly to the additional security of land tenure rather than increased access to credit. It is probable that a five year window is too small to see the implications on access to credit from the creation of a land market. Long-run comparisons that use more recent waves of data could possibly show stronger implications on non-farm work arising from the improved access to credit that land titling enabled.

IV. Self-Employment, Women’s Autonomy, and Child Health A high proportion of women in developing countries engage in low-paid jobs that remain uncovered by national labor standards. Providing women with increased access to credit serves as a viable means of incentivizing the shift from low-paid work in marginally productive activities to more remunerative work in productive activities. Ultimately, the creation of productive self-employment and new wage-employment opportunities will increase women’s cash earnings. Increased income in the hands of women, in turn, has beneficial impacts on women’s autonomy and the well-being of their children.



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