“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.”

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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”.

 

Faith Meets the Evidence-based Spirit

This week I was forwarded an article in which Jessica Jackley (the co-founder of Kiva and crowdfunding aficionado) was interviewed in Christianity Today. The article, entitled Faith Meets the Entrepreneurial Spirit, deserves a read.

That being said, I’d like to comment on several points made in the interview:

In your book, you share how the Bible verse “the poor you will always have with you” (Matt. 26:11) haunted you when you were a child. How do you think about Jesus’ words today?

This idea doesn’t haunt me in the same way today. Instead I see it as a sobering reminder that there are always people I can look for to serve and to help. At any moment in time when I have something to offer, there will be someone who has a need to receive. And roles can easily switch—we all have times in our lives when we need to reach out for help as well.

YES! This verse inspires action not passivity. Also, this video clears up some misnomers about the verse in question.

How has the microfinance industry evolved during the time that you’ve been involved in it?

People have become much more aware that microfinance can be a great tool for poverty alleviation. I’ve loved seeing an appreciation for the real power of not just one intervention: not just a microloan, but a microloan plus a microsavings account or microinsurance [insurance for health and property risks for those living on $1 to $4 a day] or other microfinance products. I think that’s where things get really powerful.

However, there’s been a backlash in recent years. But microcredit is not a silver bullet for poverty alleviation. Nicolas Kristof talks about how there are no silver bullets, but only a buckshot approach: you need a lot of smaller things to get things accomplished.

There are some studies that say microcredit hasn’t been as effective with actual poverty alleviation as many hoped it would be. But I think there is often a positive impact regardless. In my experience, I’ve seen other kinds of changes in people’s lives. I’ve visited with women, pre-loan, who speak quietly and don’t make eye contact. After they ask for a loan, they are much more confident and can see what is possible in their lives in a different way. They’ve had the opportunity to work outside the home and to build new relationships as a result. That, to me, is real change. Even when microcredit operates as relief rather than development, there is still value there.

I’ll list my thoughts…

(1) There are more than just “some studies” that say there may be better ways to spend money to help the poor than through microfinance. A more realistic characterization of this finding may be ‘almost all’ randomly assigned studies with proper control groups support this finding. In fact, J-PAL has a nice policy brief summarizing the nuanced yet largely disappointing findings of the best studies on the impact of microfinance. I even blogged about it when it was released.

(2) Most of the studies support the idea that microfinance is mostly used for purposes of consumption smoothing by providing mechanisms for savings and insurance. Rather than tapping into the so-called innate entrepreneurial ability of the poor, the evidence shows that the poor are no more entrepreneurial than the rich. Certainly some are real entrepreneurs (maybe 10%) and they benefit tremendously. But most people who own businesses in developing countries do it because of a lack of other alternatives, rather than because they are born entrepreneurs. So, yes, providing savings and insurance mechanisms may be part of a beneficial financial package, but that is decidedly different than a poverty alleviation strategy that aims to thrust everybody in developing countries into entrepreneurship.

(3) Jessica’s observation is a classic response of well-intentioned people when presented with evidence contrary to their prior beliefs – especially when the evidence suggest they ought to tweak or change the focus of their work. Egos and feelings are sensitive and sometimes we’d rather come up with a story that soothes us rather than be humble and accept that perhaps we don’t know how to best help others, alleviate poverty, and promote the development of God’s Kingdom. But here’s the thing, observations like this are prone to illusions and misunderstandings. Jessica talks about observing a difference in psychological well-being of women who participate in microfinance. If that’s true (and we may not even be so sure), we still are unable to identify the impact of microfinance on psychological well-being. Why? Because by only observing women pre-loan and post-loan we have nothing to compare these women with. Perhaps improved psychological well-being is a general trend in the region. Perhaps it isn’t. The fact is, the observation Jessica shares here does not tell us anything about ‘impact’ and is hardly a rebuttal to the evidence of the studies mentioned above. For more on this see my piece in Why Dev or Marc Bellemare’s recent post on the need for statistical literacy.

(4) Finally, what Jessica suggests: that the most beneficial impact of microfinance may be the effect it has on psychological well-being rather than financial well-being is a valid point. But we don’t have to just rely on flimsy observations with no control group and guess about how to help others, we can (and some of us are) rigorously studying this mechanism. For more see the work on aspirations and the economics of hope.

What do you wish the church would do differently to help alleviate poverty?

In my experience, churches often have calls to action that are very much intertwined with evangelism. For me, it was tough to figure out how and when to pair those two pieces and when to have them be separate things. I was never comfortable evangelizing. I just wanted to try to love people and to serve people, which I think Jesus calls us to do. And if anyone wants to talk to me about my faith, I’m happy to share about my beliefs and my personal experience.

I sometimes find that the idea of having to actively evangelize while you’re doing whatever service you’re doing can really hamper people, as it did for me in the past. We think, “I’ve got to do all this together. If I’m serving in a soup kitchen, I feel all this pressure to tell people exactly why I’m here.” For me, it made things weird. I didn’t want to force conversations or make someone else my project.

I think the question was asking about the institutional church rather than personal faith integration. The question about what the institutional church can do differently to help alleviate poverty is quite interesting. I have two thoughts:

(1) This question (at least in part) was tackled by Bruce Wydick last week on his blog: Three Things Secular Development Academics and Practitioners Can Learn from the Faith-Based Development Community… and vice versa.

(2) Faith-based development typically keeps the church at the periphery of their work – perhaps for good reasons. But there are many other reasons why centering a development or poverty alleviation program in local churches may be beneficial. I am currently thinking a lot about this question as I write up and analyze the results from my work in Kenya. So stay tuned!

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 [1.14]

I am adding a new element to this blog starting in 2014. On a monthly basis I will be posting a short list of “Links I Like”. These are external links to articles, websites, or anything else that I come across that I deem worth sharing. (I concede this is what Twitter is designed for, but—sadly—we have not yet reached the day when every sensible person I know utilizes a Twitter account.)

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