Microfinance, Formal Institutions, and Income per Capita: Cross-Country Evidence from Unconditional Quantile Regressions

Abstract

Little is known about the extent to which the macro-level scale of microfinance in a given country contributes to that country’s GDP (or income) per capita. This paper explores the relationship between microfinance and per-capita GDP in developing and emerging-market economies. We also investigate to what extent this relationship is moderated by the quality of the institutional environment in which the microfinance activities take place. A country-level panel data set for 2000–2010 was assembled to assess the impact of microfinance on incomes per capita. Estimations are based on the new method of unconditional quantile regression (Firpo et al. 2009). This method allows us to go beyond conventional mean regression (OLS) by focusing on the potentially heterogeneous impact of microfinance activities for different quantiles of the entire income distribution across countries; i.e., on potential asymmetries that may exist between low-income (relatively poor) and high-income (relatively rich) countries. Our findings suggest that scaling up microfinance activities in a country has a small (significant) positive impact on that country’s GDP per capita, which is in accordance with predictions from earlier studies (e.g., Buera et al. 2014). We also find that the positive effect of microfinance on GDP per capita tends to be reinforced by improved formal institutions in high-income countries, whereas they, at best, only marginally contribute to a greater positive effect in low-income countries where informal institutions may be relatively more important as vehicles and mechanisms for accumulating social capital and enhancing a country’s macroeconomic performance.