Microcredit and Poverty Alleviation

Rural wages can be significantly increased by increasing the demand for non-tradeables such as those produced by micro-enterprises. An increase in rural wages directly contributes to poverty alleviation in rural areas and hence to the overall poverty efforts since the majority of the poor reside in rural areas. It is important to use the term “non-tradeable” in the present context of “globalisation” since the rural small enterprises produce non-tradeables which are not attractive enough in the present media-congested discussions of all sorts of globalisation ventures, from the “call centres using freshly completed high school students” to the Ivy League universities flocking to India to tap fees paid by rich students for higher studies in areas such as business management skills, to the cutting edge nano and biotechnologies.

In order to create demand for non-tradeables in rural areas, something more basic and fundamental is needed rather than creating successful informal savings groups and that something basic is nothing other than achieving quantum growth in the agricultural sector. Analytically, it can be shown that among all available options, growth in agriculture is the optimum way for achieving growth with poverty alleviation. Growth in agriculture stimulates the demand for non-tradeables in rural areas because farm families have a high propensity to consume non-tradeables, which, in turn, will stimulate poverty alleviation concomitant with growth of microfinance and microcredit institutions. The trickle down effect of a significant poverty reduction in rural areas on the urban poverty is obvious and need not be elaborated.