The Ignored Financial Crisis

It's in microfinance, in India:

The situation on the ground seems to have remained largely unchanged since we covered the story here: collections in Andhra Pradesh are still on hold, the MFIs remain on the defensive (it seems that SKS's "voluntary" interest rate cap approach is now being more widely adopted), and the scope and nature of regulation in the Indian market remains vague. This is so far an Indian story (though there are also unrelated worries in Bangladesh) but it raises a lot of questions about what we can or should expect from microfinance and what the right way to regulate what is now a pretty big market, with a whole lot of poor borrowers, is.

India's financial regulations had been praised during the subprime crisis (e.g. here, from 2008). Maybe their risk exposures were just different.

A bunch of prominent development economists co-wrote an op-ed in The Indian Express. They conclude:

When it works well, microfinance can be a win-win situation, as the poor can borrow money at rates that may look high, but are much lower than those offered by moneylenders; and banks can make a sustainable business in lending to the poor. All this rests as much on a social contract as on a legal contract. MFIs need to be more diligent in their lending and screen borrowers better — if too many borrowers can’t repay their loans, the social obligation will start to fall apart.

But politicians also need to be wary — in taking aim at the occasional overstep, they may find themselves inadvertently destroying the whole business, at great cost both to the poor, and the financial institutions that have stepped in to work with them. If we are not careful we may end up in the pre-microfinance world. That would be a great disservice to the poor, and their hope of climbing out of poverty.

Mother Superior Gets Published

Ann Dunham, mother of Barack Obama, was a cultural anthropologist who did her dissertation research in Indonesia (which is how young Barack ended up there). Now, 15 years after her death, Ms. Dunham's work is being published in book form for the first time, by Duke University Press.

There's some obvious cynicism about the book in some quarters, but it appears that Ms. Dunham's research may have been some of the first on microfinance. I haven't read the book (and since I'm not an anthropologist I'm not qualified to judge it's value anyway), but it sounds interesting:

The book runs about 300 pages and focuses on a blacksmithing village called Kajar, in the province of Yogyakarta on the island of Java. The work has been whittled down significantly from its original form, which ran more than a thousand pages and investigated the socioeconomics of several village-based handicrafts, including batik, pottery, and the making of puppets used in shadow theater. ...

Ms. Soetoro-Ng has come to see her mother as a pathbreaker as well. "Her work in microfinance was fairly pioneering, although I didn't realize that at the time. Now it has gained immense popularity, and there are a lot of people who see microfinance as an important facet of sustainable development." Dunham wanted to see that approach used widely, but she died before she had a chance to try. "That was her goal, to reach every corner of Indonesia, but also beyond," her daughter said. "I don't think you often found that coming from anthropologists, that kind of large-scale ambition coming from these programs. I think she was remarkable that way."

It may be somewhat ironic that the book is being published at a time when researchers are calling the effectiveness of microfinance into question, but even still the project is interesting. How it is received by the academic community remains to be seen.

Links

-- One of DeLong's best-ever posts, an ode to John Hicks.

-- The Mundell-Fleming "Unholy Trinity" in action in emerging Europe.

-- The collapse of global supply chains.

-- Krugman prophesied in 1996.

-- More new research on microfinance effectiveness. There are still few reasons for optimism.

More Evidence on the Effectiveness of Microfinance

The results from the 2nd randomized study on the effectiveness of microfinance are in:

So…did microcredit “work” in Manila? Mostly not, as far as the evidence goes. Rossi’s Stainless Steel Law has held: the better the study, the weaker the effect found.

The results from the first randomized study weren't much better.

Via Blattman, who adds: "Aside: What is wrong with the aid industry that the evidence on microcredit – started in 1974 – is still uncertain and early?"

Bad News for Microfinance Proponents

The results of the first randomized trial of the effects of microfinance are in [pdf], and the conclusion is mixed:

On balance our results show significant and not insubstantial impact on both how many new businesses get started and the profitability of new businesses. We also do see some impact on the purchase of durables, and especially business durables. However there is no impact on average consumption, though as we will argue later, there may well be a delayed positive effect on consumption. Nor is there any discernible effect on any of the human development outcomes, though, once again, it is possible that things will be different in the long run.

Basically, microfinance is good for those who are already have businesses but need some cash to make investments that boost productivity. It may make it possible for some others to start their own businesses, but the evidence for this is indirect. Its effect on "human development" indicators like health, education, or women's empowerment is basically nil, although the study only looks at short-term effects. In short, the effusive language often used by microfinance proponents may have to be toned down a good bit. Pointer from the World Bank's PSD blog, which notes:

As the authors note, the impact of microfinance in education, health, etc. may not appear for quite some time. In normal times, we would just wait another year or so and take another survey. However, the financial crisis means these are not normal times. If, in a year or two, a new set of results appears to indicate no impact on human development, the randomistas could claim this as a failure of microfinance. In turn, the microfinance proponents will claim that the financial crisis invalidates the findings, arguing that the ROI for small-scale entrepreneurs was abnormally low due to the crisis. Unfortunately, we'll simply have no way to know for sure who's right.

Back in February, erstwhile co-blogger Sarah had a post on the effects on microfinance of the global economic downturn. It is here.

Nobelist Smackdown Watch

Somebody who is probably Daniel Davies took exception to this effusive rave-up of Muhammed Yunus' Grameen Bank:

One doesn't want to be too mean about Grameen, because their heart is in the right place, (albeit their bank is in a very different place on the Bangladeshi income scale than it used to be pre- the massive restructuring in 2001, a fact which is not always made clear in publicity material). But they really do have a strong habit of overselling their projects. Sobi Rani, the woman quoted in the article "'gets' the basis of successful banking". How much does she get it? She sells yoghurt door to door, that's how much she gets the basis of successful banking. Well, she doesn't actually sell yoghurt any more because the yoghurt didn't taste very nice, but there's a profitable Grameen yoghurt business now and she's involved in it. Well, maybe it's not profitable, but it's been redesigned and it's going to be all over the country! Well, it might not get distribution right away, but they're still growing and opening up factories. Well, they're not actually opening up any more factories, but if the sales get better and they solve all the problems and make a profit, then they might. But at least it's Bangladeshi people helping themselves. Well, Danone is doing most of the managing at the moment, but anyway, the point is, ADVANTAGE: GRAMEEN! In your face, capitalism and foreign aid! Microfinance rules!

Maybe-Davies says later that microfinance has a place in the world, but his over-arching criticism still rings: if microfinance is so great, then why haven't outcomes in Bangladesh improved in the 30+ years since Grameen has been operating? Is it a problem of scale? Because there are 2,462 Grameen branches in Bangladesh, and the bank has loaned nearly $8bn in a country where GDP/capita is < $500/year.

Of course there are great success stories as well, so the worst that could be said is that the record is uneven. But the popular narrative is that microfinance is a panacea for all that ails the least-developed world, and that simply appears not to be true.

Microsavings: The New Microcredit?

From the the World Bank's PSD blog:

Just what does it take to make a successful female entrepeneur in the developing world? At least part of the answer is that a woman needs a relatively effective way to save money. A new paper on Savings Constraints and Microenterprise Development reports on the results of an experiment in Kenya that provided zero-interest savings accounts to village microentreprenuers:

.

..formal savings accounts had substantial positive impacts on business investment for women, but no effect for men...roughly a 40% increase in average investment, four to six months after the opening of the account.

Emphasis added. Is it surprising that zero-percent interest-bearing savings accounts can have such a large effect? Perhaps, but the authors point to one possible mechanism:

..many women in developing countries face constant demands on their income (from relatives or neighbors), and it may be difficult to refuse requests for money if the cash is readily available in the house.

Of course, it's also harder to spend cash if you're not holding it in your hand, and these accounts didn't come with debit cards. Harder for the husband or child to spend it as well. Or maybe it's a purely psychological effect. Whatever it is, I'd love to see some more empirical work on this to see how well it holds up.

Revisiting Microfinance

Tim Harford has an excellent article on the subject in FT:

This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?

There is also a discussion of the battle for the soul of microfinance, with commercial interests on one side and charitable interests on the other. Many of the results discussed in the article are similar to those found by Karol Boudreaux and Tyler Cowen earlier this year:

For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such life saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative— such as no doctor’s visit for a child or no school for a year— is much worse.

In other words, microfinance may be a force for good, but not in the ways popularly imagined.