Chapter 6! Development as Proven Poverty Reduction

I have just posted a draft of chapter 6 (.doc and .pdf). [Update: comments from Nancy Birdsall and Eben Lazarus incorporated.] More than any other so far, this draft incorporates text from this "open book" blog, forging a richer link between the two media. By the same token, regular readers of this blog will find less new in the chapter.The subject of the chapter is what we should conclude from the academic literature on the impacts of microfinance.I posted a draft of chapter 7 back in September. So now I have done 1--7. As always, I welcome your comments.Here's the conclusion:

I draw two main lessons from this tour of the evidence. First, poor people are diverse, and so are the impacts of microcredit upon them. Thus, microcredit undoubtedly helps many people. A distinction that appears particularly important in the latest results is between entrepreneurs, who are a minority, and everyone else. More controversially, I conclude that there is no convincing evidence beyond the widespread impression that microcredit raises incomes on average. That Holy Grail, though many have sought it and many have thought if found, still eludes us. It is entirely possible that for a majority of microfinance users do not invest in microenterprises, but instead use the loans to smooth spending on necessities, as we saw in chapter 2. That would show up as lower spending (net of interest payments)---and getting to eat every day. So far, the randomized studies have not checked this possibility.The ambiguity about average impact arises from an opaque mixture of four factors: 1) different people use microfinance different ways; 2) credit in particular must make some borrowers’ lives worse and leave others little changed, and those effects weigh into averages; 3) families, villages, and neighborhoods are complex webs of causal relationships, which are hard to disentangle from each other, except with RCTs; 4) average effects depend as much on the ability of microfinance institutions to select those most likely to use finance well as it does on the spectrum of potential effects on different kinds of borrowers.These complexities no doubt obscure the real impact of microfinance; yet their significance should not be exaggerated. The benefit of cash lending in South Africa shines through in Karlan and Zinman’s data for not-so-poor people who hold jobs. Where the average benefits of microcredit for poorer people without much access to steady employment are as clear-cut, they too should shine through in RCTs. Until that happens, prudence calls for skepticism of any claims about the systematic transformative power of microfinance. And until researchers understand better how many are made worse off by microcredit, we cannot be sanguine about the ethics of the intervention. Suppose microcredit lifts 90 percent of borrowers just above the poverty line and consigns the rest to a spiral of indebtedness and destitution. Is that a reasonable trade-off, or a bargain with the devil?All of which brings me back to my encounter with those women in the Choubra district of Cairo. Should I have told them they were making a mistake, risking their good names on an unproven intervention? Can 50 million microcredit borrowers around the world all be wrong? I think not. Absent strong evidence of harm, it would be the height of arrogance to question their judgment. On the other hand, absent strong evidence of benefit, it is reasonable for me to ask whether my taxes are well-spent subsidizing their credit.Think of the paradox this way. In the last decade, the mobile phone has spread like wildfire in most poor nations, including the Democratic Republic of Congo (DRC), a vast and war-torn nation with shards of government. Few doubt that this is a good thing. Scarce are the skeptics who demand RCTs to prove that mobile telephony helps the poor. Clearly, interconnection adds new possibilities to life. And the triumphs of Grameen Phone in Bangladesh and Celtel in the heart of Africa are properly sources of national pride. By demonstrating corporate excellence in nations long seen as economic basket cases, they inspire imitators in other lines of business. Indeed, most of the countries that are today rich got that way thanks to just such business successes, repeated a thousand times over. But another Western import has also overspread the developing world: cigarettes. Few doubt that this is a bad thing. The scientific evidence on the dangers of smoking should trump any attempt to cast the global tobacco addiction as a welcome triumph for consumer autonomy of entrepreneurship. So is microfinance more like cell phones or cigarettes?Cell phones, almost certainly. Though the dangers of debt are indisputable, researchers have produced no solid evidence that microcredit systematically does harm. Savings, insurance, and money transfers seem even more benign. But if microfinance is the monetary equivalent of the mobile phone, does it deserve permanent charitable support through grants, cheap loans, and unusually patient equity investment? To turn that around, should Mo Ibrahim win a Nobel Peace Prize for founding Celtel, as Yunus did for founding Grameen? Should Kiva.org broker airtime minutes as well as credit?Unless or until randomized microfinance trials show strong benefits, the most convincing case that can be made for charitably supporting microfinance must rest on grounds less compelling than hard and evidence of impact---but also more honest. The next two chapters explore two major themes in this vein, both hinted at in the mobile phone metaphor: the extent to which financial services give poor people more options and agency, and the extent to which microfinance has contributed to the commercial fabric of nations.