I think this is a much more plausible view of much of the drop-out phenomena than is “credit constraints.” First, strictly speaking, “credit constraints” is not a very good description of the problem. Let us take the author’s numbers seriously that the return to schooling is, say, 8-10 percent. Let us suppose that families in developing countries could borrow at the prime interest rate. The real interest rate in many countries in the world is around 8 to 10 percent. So given the opportunity to borrow at prime to finance schooling many households would rationally decline the offer. Second, imagine one relaxes the pure credit constraint—would that money flow into education? Returns on investments from micro-credit programs (which typically have lending rates between 12 and 20 percent per annum) are profitably at those lending rates. One would need more research but the range of investments for which households usually borrow have much higher returns (and quicker) than 8-10 percent.
(Copenhagen Consensus 2008 Perspective Paper, Pg8)
Huh this take did not survive the test of time well, given the last 13 years of research on microfinance.
Linch, Can you explain. What did not survive the test of time?
The belief that micro-credit has good investment ROIs for the typical recipient.