Comparing Microfinance and Education for Poverty Reduction – A Macro Perspective

University essay from Lunds universitet/Ekonomisk-historiska institutionen

Abstract: Better access to finance and higher education levels in a country are two major policy areas of governments and international development cooperation organisations for the goal of reducing poverty. Microfinance has become a popular instrument to facilitate access to finance, but comparative evidence on a macro scale is scarce. This thesis examines the relative importance of the two policy areas using an unbalanced panel of 42 countries over the period of 1999 to 2013. As an indicator for microfinance, gross loan portfolio is used and for education, government expenditure on education. As measures of poverty, the poverty headcount ratio, the poverty gap and the squared poverty gap are used. Taking into account education, the effect of microfinance becomes smaller in comparison to previous empirical studies. Generally, the thesis finds a similar effect of the two determinants in absolute terms and on the three of the poverty measures. Education is more robust to different regression strategies. From a simulation exercise of the expected effects on poverty headcount ratio, the finding is that, on average, a relative increase by the factor 2 in microfinance gross loan portfolio compares to an increase of the factor 1.15 for government expenditure on education.

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