Not Your Father’s Aid Agency – “The Lab” [Part 1]

I’ve been spending this summer at USAID in their newest bureau the U.S. Global Development Lab. It has been an interesting, enlightening, and inspiring experience so far; and so, I’ll be sharing a little bit about “The Lab” over the next week or so in a series of posts.

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This first post highlights the Lab’s commitment to innovation and willingness to fail. Critics of foreign aid often (at some point) suggest that aid is not innovative and that aid agencies have been simply funding the same old programs for years and years. Although this critique fits nicely into a political philosophy where government is always inept and inefficient, it simply is not always true at USAID – and that is largely due to the existence of the Global Development Lab.

One part of the Lab’s mission is to “produce breakthrough development innovations”. This is (currently) being done in a number of ways, I’ll mention two:

First, the Lab has an open innovation fund, called Development Innovation Ventures (DIV). This program funds new development ideas (by anybody and at anytime) that are (1) evidence-based, (2) cost-effective, and (3) have potential for scale and sustainability. So far DIV has funded over 150 innovations in countries across the developing world. One example of a DIV grantee is Off-Grid Electric a private electrical company in Tanzania. Here is a bit about how USAID funded Off-Grid Electric and gather more evidence of rigorous impact and cost-effectiveness:

Off-Grid Electric provides solar energy to people with limited or no access to the grid in Tanzania, one of the least electrified countries in Africa. DIV took a calculated risk on Off-Grid at an early stage and continued to provide funding as they expanded and gathered more evidence. The increase in venture funding from DIV helped demonstrate the economic viability and scalability of Off-Grid’s approach, allowing the company to access additional financing and expand its coverage, accelerating its progress toward the goal of reaching 1,000,000 households by 2017. By early 2016, Off-Grid’s service had reached 100,000 households and was available in 14 regions throughout the country. They continue to add 10,000 new homes a month. Leveraging the contributions from DIV, they have raised $95 million in commercial capital.

Second, the Lab has an open innovation challenge contest, called Grand Challenges for Development. This program focuses attention and incentivizes innovation in an area with specific need. This program taps ideas from “non-traditional” actors within the aid industry and capitalizes on new ideas and perspectives. Grand Challenges include: combating Zika, fighting ebola, saving lives at birth, all children reading, powering agriculture, and many more.

At the Lab, a lot of inspiration is garnered from JFK’s “We choose to go to the moon” speech. At USAID, we choose to end poverty, not because it is easy but because it is hard… And to complete this goal we need inventions that have not been invented yet…

 

A necessary aspect of producing innovations is being willing to fail. Not every good idea will end up being supported by rigorous evidence, and will be cost-effective, and will be able to be sustainably scaled. This attitude is a huge step for an aid agency, in particular, and a government agency, in general as there is practical tension between being willing to fail and recognizing that failure can result in loss of life.

I was sitting in an orientation to the Lab and the core value of willingness to fail was proudly presented as, “when lives are not on the line, we are willing to fail and learn from failure.” I asked, “In the USAID context, when are lives not on the line?” In international development work, if we think our work actually works, then it influences livelihoods. Thus, failure necessarily means that lives are on the line.

It is important to note, however, that global poverty is an unsolved problem. We currently don’t know how to solve it or end it. Thus, failure is inevitable. In this situation, the attitude of recognizing this reality and learning from failure is absolutely necessary. This all may sound quite difficult, but it really is just plain old humility; and I think humility is really cool.

The next post will focus on the Lab’s commitment to impact and evidence.

Explaining the (negligible) Impacts of Microfinance

In a recent article over on Five Thirty Eight, Ben Casselman writes about why microloans don’t solve poverty. It is an excellent summary of the recent rigorous evaluations into the impacts of microfinance. He notes that microfinance is a $60 billion industry across 6 continents, won a Nobel Peace Prize back in 2006, and yet we are only just now understanding if it actually works.

I’ve written before (links here and here) on the 6 independent randomized control studies finding that microfinance fails to make the average participant better off and yet that it doesn’t make anyone worse off. Since these studies were published the pertinent task has been to explain these findings. Here again, Ben does an excellent job summarizing this research.

The ‘not everyone is an entrepreneur’ explanation: 

One popular explanation is that many participants in microfinance don’t use the loans to start or grow a business. Instead they use the extra cash to cover expenses or smooth consumption. When loans are used in this manor they are unlikely to cause any measurable changes in the long run. This explanation suggests that perhaps microloans is only truly valuable to a small group of people with a specific set of attributes and characteristics. The typical business owner in a developing country has not chosen to be an entrepreneur as they are simply participating in this activity by default. Expecting the poorest around the world to ‘entrepreneur themselves’ out of poverty is beginning to seem like nothing more than a pipe dream of an idealist. It seems quite obvious that only those who truly desire and aspire to grow their business will have a chance of benefiting from microloans.

What is challenging about this explanation is that there remains a lack of knowledge as to how to predict who will benefit from microloans prior to receiving the loans. This lack of knowledge causes confusion as to the explicit goals of microcredit and hinders positive iteration. This issue is further complicated by some of my (and other’s) research that examines if living under conditions of poverty for years (and perhaps generations) can squelch aspirations and other essential elements of hope. If this is the case, then microfinance programs could benefit from aiming to boost aspirations, rebuild personal agency, and diminish internalized perceived constraints. (In fact a study on such a program is ongoing as I type.)

The ‘early-adopter vs. late-adopter’ explanation:

This second explanation has a lot of nuance to it. Maybe the negligible and small impacts of microloan programs (measured in the 6 RCTs) are driven by the fact that these studies were evaluating microloan programs in places where similar type programs already substantially existed. Perhaps way back in the 1990s and early 2000s when microfinance was first being rolled out the impacts were positive and maybe even large (for those who had the skills and desire to invest in their business). We actually don’t know, but given the exuberance of many of the primary actors in the early days of microfinance (Muhammad Yunus et al.) it may be safe to assume that the impacts in the early days were not as small or negligible as they are today.

This actually is not a new idea. Ever since way way back in 1957 with the work of Zvi Griliches the idea that technology adoption within a given population follows an S-AAEAAQAAAAAAAABxAAAAJGNjNTY3OTYzLTAwNDgtNGVmMC1iNjY5LTExOWM0Yzg5ZTg4Ywshape curve has been standard. The figure to the right shows first their are “innovators” then the “early adopters” followed by the “early majority” and finally technology reaches “saturation”. (If you’re interested here is a figure showing the adoption and diffusion of technologies such as the TV, electricity, cars, etc.) What is important to note here is that this behavior largely occurs over and over for almost any technology because the benefit of adopting the technology is the greatest for those who first adopt. Other than a “strategic delay” for purposes of social learning, the benefits of a technology diminish as more and more of the given population adopts the technology. As a technology nears saturation, the “laggards” as they are sometimes called, adopt simply to “keep up with the Jones’s” and receive little to no benefit.

For example: my grandparents just got iPhones. Prior to a couple months ago they owned flip phones that were not even enabled to send or receive text messages. They didn’t spring for the iPhone 1 through 5 because they didn’t have the skills or desires to use those phones to their potential. Now they both have iPhone 6’s. The technology is no-doubt better than their old flip phones. But does the fancy “smart” capabilities benefit their day-to-day lives very much? I’d venture to guess the benefits are very small or negligible.

Now, it’d be wrong and misleading to evaluate the social and economic impact of the iPhone based on those who adopted it in 2015. The iPhone has transformed the way the world runs, specifically for those who adopted it five to six years ago. This might be what is going on with microloans. The “early borrowers” of microloans first took loans back in the late 1990s and early 2000s. The 6 randomized studies above evaluated the impact of microloans several years later, probably on the “late borrowers”, and found negligible and small benefits.

(For nerdy readers, Bruce Wydick has a note forthcoming the in Journal of Development Effectiveness specifically on this explanation.)

The Future of Microfinance

What does this mean for the future of microfinance? I think it is instructive to consider how Apple has handled iPhone technology. They’ve continued to innovate and improve. Better cameras, longer lasting batteries, increased functionality, etc. I think, when these two explanations are taken in conjunction, it is clear what microfinance organizations need to do. Innovate. Make the product better. Apply insights from behavioral science. Inspire increased aspirations. Encourage personal agency. Break down internalized constraints. Don’t just stand pat and continue to offer the plain vanilla “microfinance 1”.

 

The History of Honor

Something that becomes very clear very early in anybody’s study of economic development is the importance of a solid foundation in economic history. In fact there is a recent NBER working paper that advocates for a marriage of the two academic sub-disciplines.

In light of this, one of the things I think a lot about these days is how institutions (broadly speaking) influence how we make decisions and behave. Through reading the works of Douglas North (and commentators) and through my work grappling with the optimal role of the Church in encouraging and equipping business growth, in particular, and in propelling economic development, more broadly, I’ve begun to learn something seemingly important.

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