Given this increasing interest, the microcredit market has grown to more than $27 billion. But do the poor benefit enough to justify the resources? Microcredit often yields noneconomic benefits such as self-esteem and social cohesion, and empowers women. But these are not enough. The issue is that microcredit does not significantly alleviate poverty.

Most clients of microcredit are not entrepreneurs by choice.

The problem does not lie with microcredit, but with microenterprises. Most microcredit clients are caught in subsistence activities with no prospect of competitive advantage. With minimal skills and little capital, these businesses operate in arenas with low entry barriers and too much competition; they suffer poor productivity that leads to meager earnings that cannot lift their owners out of poverty. This should come as no surprise. Most people do not have the skills, vision, creativity and persistence to be entrepreneurs. Even in developed countries, employees—not entrepreneurs—represent 90 percent of the labor force. Most clients of microcredit are not entrepreneurs by choice; they would gladly accept a factory job at reasonable wages if one were offered. We should not romanticize the idea of the poor as entrepreneurs. The International Labor Organization uses a more appropriate term: own account workers.

The best way to eradicate poverty is to help create jobs on a large scale in labor-intensive industries. Consider the pattern of poverty and employment in China, India and Africa, which together account for roughly three-quarters of the world’s poor citizens. In China, a large and growing percentage of the population is employed and the number of people living in poverty has declined in recent decades. In Africa, a small and shrinking fraction of the population is employed, and the incidence of poverty has remained unchanged during the same period. India’s performance lies somewhere between the two: The number of jobs has grown some, and the number of people in poverty has shrunk a little.

China, Vietnam and South Korea significantly reduced poverty in recent years with little microcredit activity. On the other hand, Bangladesh, Bolivia and Indonesia have not been as successful despite the influx of microcredit.

Many people who have jobs are still stuck below the poverty line. Job creation is not enough. We also have to increase productivity so that wages are high enough to enable employees to rise above poverty. One way to increase productivity is to encourage enterprises that are large enough to achieve economies of scale. Rather than lending $200 to 500 women so that each can buy a sewing machine and make garments, we would be better served by lending $100,000 to an entrepreneur with managerial capabilities and business acumen to help her set up a garment manufacturing business employing 500 people. This type of business can exploit economies of scale, deploy specialized assets and use modern business processes to generate value for both owners and employees.

Poverty alleviation cannot be defined only in economic terms; we must also address a broader set of needs. Amartya Sen, the Nobel Prize–winning economist, argues that development can be seen as a "process of expanding the real freedoms that people enjoy." Services such as public health and safety, basic education and infrastructure nurture these freedoms and increase the productivity and employability of the poor, and thus their income and well-being. So why not invest in both microenterprises and larger enterprises? Financial resources are limited and expensive. Governments in developing countries have only so much political capital and capacity. Philanthropists, businesses, governments and civil society need to prioritize and invest in development approaches with the highest payoffs, and reallocate their resources away from microcredit and toward supporting larger enterprises in labor-intensive industries. They should also focus on providing basic public services that improve the employability and productivity of the poor.

Aneel Karnani is associate professor of strategy at the Ross School of Business at the University of Michigan.