White Rose University Consortium logo
University of Leeds logo University of Sheffield logo York University logo

Community development finance institutions and the ‘poverty trap’: social and fiscal impact

Lenton, P. and Mosley, P. (2005) Community development finance institutions and the ‘poverty trap’: social and fiscal impact. Working Paper. Department of Economics, University of Sheffield ISSN 1749-8368

Full text available as:
[img]
Preview
Text
SERP2005008.pdf

Download (550Kb)

Abstract

This paper examines the current and potential ability of `community development financial institutions´ – institutions aimed at reducing the incidence of financial exclusion at the bottom end of the capital market – to reduce poverty, and the fiscal implications of this process. It seeks to connect the growing literature on labour supply functions for the self-employed with the literature on poverty and measures to escape from it, generating in the process a `poverty exit function´ which is then estimated against data (at this stage, a pilot sample of 45 self-employed households only, plus their employees) for three UK cities. Our model, by analogy with the `poverty trap´ models sometimes used in developing countries, has potentially self-reinforcing features, in which in the presence of certain parameter values efforts to get out of poverty only make the problem worse; but this, to our knowledge, is the first application of such a model to an industrialised country. The quantitative analysis indicates a negative role, in escaping from the poverty trap, for uninsured shocks. It indicates a positive role for formal education and for institutional measures which protect against risk; indeed, some of independent variables such as training are significant only if interacted with protection against risk, implying that simple injections of inputs are insufficient as a support policy for the sector. We make a preliminary investigation of the fiscal savings arising from investment in the CDFI sector, of which the upper bound is about £350 million a year or about 1.5 per cent of the total social social security budget; these impacts, however, are sensitive to variations in the policies of both CDFIs and the various levels of government support for the sector. The qualitative part of the analysis, in addition, suggests a positive role for `integrated support´ to microentrepreneurs which combines finance, mentoring and training. We have observed that many escapes from the poverty trap are achieved by employees rather than by entrepreneurs, which draws attention to the importance of growing along a labour-intensive production function, which ironically was in our sample secured better by small-to-medium firms than by start-up enterprises. Finally, a key variable in the exit-from-poverty process is the `regeneration multiplier´: the extent to which benefits provided by CDFIs remain within, or leak outside, target areas of high social deprivation. This multiplier varied greatly across our samples, being highest in Glasgow and lowest in Sheffield. We surmise (and proper analysis of this parameter is an important agenda for future research) that the regeneration multiplier varies negatively with the wage level and positively with the level of human capital inside regeneration areas. Diversification of financial products, and accompanying expenditure in support of regeneration areas by incentives to source labour and materials locally, could be a useful addition to this policy agenda.

Item Type: Monograph (Working Paper)
Copyright, Publisher and Additional Information: The Sheffield Economics Research Paper (SERP) series offers a forum for the research output of the academic staff and research students of the Department of Economics, University of Sheffield. Papers are reviewed for quality and presentation by a departmental editor. However, the contents and opinions expressed remain the responsibility of the authors. All papers may be downloaded free on the understanding that the contents are preliminary and therefore permission from the author(s) should be sought before they are referenced.
Institution: The University of Sheffield
Academic Units: The University of Sheffield > Faculty of Social Sciences (Sheffield) > Department of Economics (Sheffield) > Sheffield Economics Research Papers Series
Depositing User: Repository Officer
Date Deposited: 20 Oct 2009 13:18
Last Modified: 04 Jun 2014 10:42
Published Version: http://www.shef.ac.uk/economics/research/serps/yea...
Status: Published
Publisher: Department of Economics, University of Sheffield
Identification Number: Sheffield Economic Research Paper Series 2005008
URI: http://eprints.whiterose.ac.uk/id/eprint/9917

Actions (login required)

View Item View Item