In my very first experiment, Suresh de Mel, Chris Woodruff, and I gave small grants of capital to microenterprises in Sri Lanka. We found that these one-time grants had lasting impacts on firm profitability for male owners. However, despite these increases in firm profits, few owners made the leap from self-employed to hiring others.
In 2008 we therefore started a new experiment with a different group of Sri Lankan microenterprises, trying to see if we could help them make this transition to becoming employers. Eight years later, I’m delighted to finally have a working paper out with the results.
This is the eleventh in our series of posts by students on the job market this year
Researchers, policymakers and aid organizations have devoted lots of attention to improving access to credit and, increasingly, insurance for small firms and farms in developing countries. Yet some recent papers find puzzlingly weak effects of insurance and credit on growth and profits (Cole et al. 2014, Banerjee et al. forthcoming).
One potential explanation may be that in developing countries, it’s not just financial markets that have imperfections, but that other key markets, such as markets for labor and land, have problems, too. In particular, high costs of supervising or finding trustworthy employees may make it expensive to add labor (Eswaran and Kotwal 1986, Fafchamps 2003, Foster and Rosenzweig 2011). For farms specifically, missing land markets may further constrain expansion (Goldstein and Udry 2008, Adamopoulos and Restuccia 2014).
“There is nothing in this book that needs to be confirmed by complex laboratory experiments. You have only to open the window or step into the street”, Hernando de Soto, The Other Path, p14., 1989.
Typical policies to improve the incomes of poor households and their businesses are based on the sustained provision of services – be it microfinance with multiple loan cycles and regular meetings; conditional cash transfers with regular transfers over a period of years; or business training programs which are based on the idea that capital along is not enough – as in the proverb “give a man a fish and he eats for a day, teach a man to fish and he can feed himself for life”.