Evaluating Poverty Alleviation through Microcredit: Methodological and Empirical Evidence from Indonesia

Chikako Yamauchi, University of California, Los Angeles

Despite the increasing popularity of microcredit, there is limited evidence about the effects of access to credit on earnings opportunities and poverty. This paper fills this gap by evaluating Indonesia's anti-poverty program, which provides poor villages a fund for small business loans. Exploiting the fact that the government transfers the same amount of block grant to selected villages regardless of population, I examine the effect of a marginal increase in program funds per household on labor supply and consumption. Results show a 3% shift of workers from helping family members to running self-employment activities, suggesting that the program eases credit constraints for the poor who could not otherwise start businesses. The self-employed also create labor demand for wage workers. Despite these benefits, consumption is unchanged, and Shockingly, child labor hours are intensified to meet the increased labor demand. These results provide a caution against the claim that credit alleviates poverty.