“What do you do?” “I’m a development economist”

There is a small Twitter fad going around recently, it goes something like this:

“What do you do?”

“I’m an economist.”

“Oh, cool! I’ve been thinking about making some investments, any advise?”

“I’m not that kind of economist. I’m a development economist who studies poverty alleviation in Africa.”

“Ah, okay. I’ve never been to that country.”

Continue reading

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 Impacts of Microfinance

My last post highlighted seven randomized evaluations of microfinace programs from around the world. I’ll admit, you have to be a little wonky to read through even one of the papers completely. Luckily, Innovations for Poverty Action (IPA) has created an easy to understand policy bulletin. [Read the entire brief here] Here are some highlights:

Key Results:

1. Demand for many of the microcredit products was modest.
2. Expanded credit access did lead some entrepreneurs to invest more in their businesses.
3. Microcredit access did not lead to substantial increases in income.
4. Expanded access to credit did afford households more freedom in optimizing how they earned and spent money.
5. There is little evidence that microcredit access had substantial effects on women’s empowerment or investment in children’s schooling, but it did not have widespread harmful effects either.

figure 2

 

Take-up is an important indicator of the success of any customer focused enterprise. In settings where access to the services of the MFI were provided to anyone who passed as “eligible” (poorly defined) 13-30% actually took advantage. That’s 3 out of every ten people. At best! (Even in places where access to the MFI was selected out of a group of people who expressed interest for microcredit take-up was roughly around half of the population.) This fact alone should be a huge reality check for those who advocate for microfinance as the vehicle which paves a road out of poverty for the masses.

Screen shot 2015-02-27 at 9.22.07 PM

 

Microcredit did lead to increased business ownership in some locations. But a quick statistics lesson and a caveat seem important.

First, for a lesson in statistical significance. Only two out of the seven studies reported results of statistically significant difference between the treatment group and the control group. What this means is that the other five studies did not find much variation in increased business ownership of those who had access to MFI’s compared to those who had no access to MFI’s. This is important as the impact (or average treatment effect) of any program represents the effect of those who received treatment minus the effect of those same people who did not receive treatment. It is actually impossible to measure this, as we can’t go back in time and see how a household would fair in the absence of an MFI. When we randomize assignment (access to the MFI, in this case) we are mimicking this experimental ideal by comparing individuals who are statistically the same.

Second, increased business ownership may not be something we want to see from an MFI. Spend any time in any developing country and you will notice that there is no shortage of small businesses. They line the street and side alleys. Some mistake this popularity in business ownership as a propensity for entrepreneurship among the global poor. It may rather be due to a lack of other viable alternatives for economic activity which drives this popularity in business ownership than anything else. Starting a business is often easy, it’s sustaining it and expanding it which is the hard but important part.

Screen shot 2015-02-27 at 9.22.34 PM

 

In summary microcredit fails to impact the things that matter most, consumption (economists favorite observable variable for economic well-being) and social well-being. In fact some studies find decreases in these outcomes!

What does this mean for microcredit moving forward? I don’t think these studies should spell the end for microcredit as a micro-development strategy around the world. I simply think our collective enthusiasm for this medium of assistance needs to be a bit more muted and our expectations need to be a bit more realistic. Also, perhaps microcredit misses the target of what the global poor actually need. Many use microcredit as a way to smooth consumption when income (particularly for farmers) is lumpy. Perhaps we need to think more about products that assist in helping people have more freedom with how they spend their money. Clearly microcredit is not perfect, much can be done to tweak and improve this method. Of course, the best way to do this is through iteration. Trying something new, testing it, gathering feedback, and improving.

Links I Like [1.15]

We’ve gotten a bit of track with the monthly links I like post. I’ll blame graduate school.

Ok, enough with the excuses, here are January’s top links (according to me).

12 Papers Development Practitioners Should Read

It would be a shame not to point to the six (!) field experiments on the effectiveness of microcredit published this past month in the American Economic Journal: Applied Economics (all open access, too! So no excuses!).

The Miracle of Microfinance? Evidence from a Randomized Evaluation

The Impacts of Microcredit: Evidence from Ethiopia

The Impacts of Micrfinance: Evidence from Joint-Liability Lending in Mongolia

Estimating the Impact of Microcredit on Those Who Take It Up: Evidence from a Randomized Experiment in Morocco

Microcredit Impacts: Evidence from a Randomized Microcredit Program Placement Experiment

The Impacts of Microcredit: Evidence from Bosnia and Heregovina

Summary: Does microcredit work? Well, it depends, but probably not as well as you thought. Quoting from the introduction written by Abhijeet Banerjee, Dean Karlan, and Jonathan Zinman, the most consistent finding across all six studies is the “lack of evidence of transformative effects on the average borrower”. As Justin Sandefur and Lant Pritchett point out there is quite a bit of heterogeneity in these studies and we should be careful what we infer from the results.

Worm Wars: A Review of the Reanalysis of Miguel and Kremer’s Deworming Study

Your Guide to Deflate-gate/Ballgazi-Related Statistical Analysis

Links I Like [6.14]

There was lots to like in the past month. The Economist highlighted some recent studies on the impact of microfinance. The consensus is still: it works, except when it doesn’t.
Cass Sunstein (of Nudge fame) wrote an essay on Albert Hirschman’s thoery of the “hiding hand”. This essay will be the introduction of a new edition of Hirschman’s essential Development Programs Observed.
There have been many excellent blog posts recently about the SAOS study on Fairtrade. (Fair-trade has never worked. Why is everyone so excited now?, Million Dollar Question: Does Fairtrade Work?, and What is Fair to Expect of Fairtrade?)
Arvind Subramanian, a Senior Fellow at the Center for Global Development, created an extensive reading list for understanding economic development.
Finally, Owen Barder (of “Development Drums” podcast fame), wrote an excellent blog piece on Google and the Trolley Problem. Basically, that philosophical hypothetical about a speeding trolley and the choice to do nothing and let five people die or take action and kill one person is no longer hypothetical.

All of these links I like, but there are three links I LOVE:

1. Why You Should Root for Nigeria (or Brazil, Mexico, or Ghana
Development economist, Dean Karlan made a quick and dirty formula for who you should root for in the World Cup if you hold strongly to utilitarian principles and global happiness.

2. Sinister Tips for Mission Trips
Bruce Wydick (the guy who did the evaluation on Compassion International’s child sponsorship program) has written a marvelous piece about summer mission trips in the style of C.S. Lewis’s Screwtape Letters. It is a great mix of satire and utmost sincerity. If only every development economist wrote like this…

3. Please Do Not Teach This Woman to Fish
Daniel Altman, professor of economics at New York University, wrote a harsh but clearheaded plea for all those who work with small-scale entrepreneurs in developing countries to rethink their strategy.

Finally, the picture of the month – from 40 Maps that Explain the Middle East I really enjoy these nighttime space images. Check out the light lining the Nile River!

middle_east_night_sky