Is It Ever Better to Lend Than to Give? A Social Embeddedness View of Alternative Approaches to Poverty Alleviation

Recently a promising new practice of promoting economic growth and opportunity for the poor, micro-lending, has emerged in global efforts to alleviate the conditions of poverty. In this chapter we examine micro-lending as an activity that potentially can help reduce the vulnerability and isolation of the poor. Controversially, the basis of micro-lending is debt financing for the poor. Traditional charity or public welfare generally employs non-contingent gifts to the poor. That is, charity provides direct assistance to poor through wealth transfers without explicit expectation or terms of repayment. From a purely economic perspective, charity would always be preferred over loans by poor recipients. In this contribution we explore an apparent paradox: that lending might actually be preferable to charity when the intention is the permanent alleviation of poverty. By viewing the problem of poverty alleviation through the perspective of embeddedness we reveal a complex story of the social meaning of charity and lending (Gouldner, 1960; Mauss, 1923), and their impact on poverty (Afrane, 2002; Granovetter, 1973, 1985). From this view we offer propositions about when and how direct lending might be a more effective practice for poverty alleviation than charity.