Getting to the Point

Last Friday, I convened a small meeting of peer reviewers of my book. Turns out getting busy experts to review a 100,000-word manuscript isn't easy, which made invited reviewers more numerous than actual reviewers and made me all the more grateful to the latter. Beth Rhyne came in person, as did my boss Nancy Birdsall; Rich Rosenberg and Jonathan Morduch joined by Skype. (Skype's new group video-conferencing feature worked well, by the way.) Stuart Rutherford, Greg Chen, and Deepa Narayan all sent comments by e-mail.I think the session went really well. Happily, the reviewers did not recommend radical changes such as cutting or consolidating chapters, though one did point out that the development-as-industry-building theme comes late given its ultimate importance. The strongest message I got was exactly what I needed: get to the point. Figure out your bottom lines, state it forthrightly in the bookend chapters, and make sure the internal chapters connect to and serve those bottom lines. The technical term for this kind of advice is "kick in the pants."The other big message in my view was that I should emphasize the novelty of my ecumenical approach as a strength in itself, with implications for development studies more generally. To understand a major class of interventions, you need to systematically not only the evidence but the theories that link evidence to outcomes. To play off a hot trend which I think is quite valuable, randomized trials do not alone suffice to reveal the full story of the role of microfinance in development, nor provide all the relevant policy guidance. The analogy I've used before is with mortgages: an RCT of mortgages would not fully enlighten us about the role of the mortgage industry in the economy.I think these two pieces of guidance go together. My compulsion to hear out all sides is a weakness and a strength. Where it is a weakness, in preventing me from taking a stand, I need to overcome it. Where it is a strength, I need to take pride in it. As you can see, this is a pretty personal process.Pondering all this, I added the following text to chapter 1. I'm really interested in what you think:

In the pages to come, I will share the fruits of my own search for a full, balanced understanding of the impacts of microfinance. If you, like me, have been confused by the conflicting sunny and sour messages about microfinance, then the results of my search are the main thing I have to offer you. For me, this book has been a medium of thought, a source of discipline, and a vehicle for sharing my views with you. I wrote it in public—something I had never seen done before—by sharing drafts, questions, and discoveries through an “open book” blog.[1] Working this way garnered me feedback on earlier drafts, helpful leads and ideas, and a sharper sense of the audience for which I write. This book records my intellectual journey. It is a kind of travelogue. If you did not join me on that journey, through the blog—or even if you did—I hope you will join me vicariously through this distilled record of it.Here is the destination I reach: Murshida’s story is not the whole story of microfinance. But neither is every borrower an Eva. The success of microfinance is real, if subtler than generally understood. Its strength lies not in lifting people out of poverty—industrialization and jobs do that better—but in leveraging modest subsidies to build financial institutions and industries that help millions of families manage poverty better. Maybe that truth disappoints relative to the myth. But the good that microfinance can do is respectable by the standards of foreign aid and philanthropy, in which failures are common and successes hard-won. And whether microfinance lives up to the expectations of those too rich to need it is less important than whether microfinance does reasonable good at reasonable cost. As Pankaj Jain and Mick Moore have written, “To properly appreciate the great achievements of the microcredit movement, one has to be more skeptical of its self-image than is normally considered polite or respectful.”[2]If your daughter shows a flair for guitar, you don’t force her to paint instead. Just so, my evaluation leads to a prescription: help microfinance play to its strengths. Instead of shoving it in the direction of putting capital in the hands of as many poor people as possible, on the theory that this will launch them all into entrepreneurship and out of poverty, focus on mass-producing services to help people manage the uncertainties of being poor. To the extent practical, deemphasize credit—which after all is leverage, and amplifies risk—in favor of savings and insurance, which can cushion in times of trouble. And deemphasize highly subsidized credit to the poorest, since dependence on limited subsidies throttles growth, and since common sense says that the poorest are the most vulnerable to the downside risks of credit. Instead, favor the building of permanent, dynamic, customer-oriented institutions that cover most or all of their budgets with fees and interest. For microfinance insiders, I side with the philosophy of the American network group Acción International and the German ProCredit holding company of microfinance banks; and I question the Microcredit Summit Campaign in its target-based push to get microcredit to 175 million of the world’s very poorest by 2015.[3] For potential funders of microfinance, ranging from my mother to the Gates Foundation, I advise against directly financing microcredit portfolios. (I’m happy to report that neither does.) Instead, donate to organizations such as Acción, Freedom from Hunger, and Women’s World Banking, which have track records in institutional midwifery with adaptive blends of advice, grants, and investment.[4]Perhaps you noticed my caution a couple of paragraphs back in referring to the “good that microfinance can do.” The strengths that I identify in microfinance are no more automatic than the ones I debunk. A truth too easily ignored until the late-2010 microcredit crisis in Indian is that microcredit markets, like all credit markets, are susceptible to bouts of mania and depression. Overlending and overborrowing happen, and are a particular concern for people close to the edge of survival. Microcredit is like a prescription drug—useful in moderation, but dangerous and even addictive in large doses since some who borrow too much respond by borrowing more. And as recent financial crises have shown, when the money is easy, intermediaries such as investment funds and lenders have strong incentives not to worry about whether the money is well lent. Just in the last few years, we have seen overshoot and crash in Bosnia, India, Morocco, Nicaragua, and Pakistan—perhaps the first bubbles in history fueled by generosity rather than greed.[5] Some of the bubbles appear to have popped of their own accord in the classic, inevitable manner of financial manias; others were popped by populist political backlashes. Thus there is a pressing need for the global microfinance industry, from Kiva users to big investors to lenders, to recognize and tackle the challenge of moderation. Of course, just as bubbles are a fixture of financial history, the microfinance industry will never perfectly balance prudence and expansion. But it can do better.It has become popular lately to bust the myths of microfinance. Milford Bateman of the Overseas Development Institute published a book in 2010 called Why Doesn’t Microfinance Work? The Destructive Rise of Local Neoliberalism. A few months later, Tom Heinemann, a muckraking documentarian of globalization, released Fanget i Microgeld in Norwegian (“Trapped in Microdebt”), then an English version called The Micro Debt. Newspaper articles and blog posts announcing that microfinance is not a panacea, not a silver bullet, are now a dime a dozen. I wonder whether now it is the hype that is overhyped…But the case against microfinance as a proven weapon against poverty needed to be made.[6] This book also makes the case, with a demanding review of the relevant academic literature in chapter 6. Still, I tend to lose patience with those get excited about what microfinance does not do while exhibiting little curiosity about what it does do. It is a trap to equate myth busting with evaluation. That is why this book’s contrarianism is also aimed at the threats to microfinance’s real strengths, above all the overenthusiastic flow of capital into microcredit. Ironically, while I distance myself somewhat from the icon smashers, they may be my best allies. By demolishing the assumption that more money for microcredit is always good, they may slow the flow of money into microcredit. Their deflation of expectations may stop the inflation of bubbles.That in a nutshell is the destination I reached through the blog and this book. Now that I have completed the journey, heard from blog commenters and peer reviewers, and returned to edit this opening chapter, I realize I have something more to offer: a conviction that my journey is a destination too. That is to say, there is a lesson beyond what I learned about microfinance, about how I learned. It is in the nature of modern society that talented people specialize. As a result, the global microfinance conversation is carried on by a wealth of experts each approaching the subject from a narrow angle. But if you want to understand something as variegated as microfinance, you can’t just think about it one way. You can’t only listen to the economists running randomized trials or the anthropologists living in the villages or the Wall Streeters syndicating loans—though all have something to teach. You must be brave, open-minded, and patient enough to break down the walls between world views.In particular, a hot and good trend in development economics over the last decade has been to perform randomized experiments to determine “what works.” Leaders of this movement such as Dean Karlan, Esther Duflo, and Abhijit Banerjee have just popularized it with books whose subtitles should entice lay readers: How a New Economics Is Helping to Solve Global Poverty and A Radical Rethinking of the Way to Fight Global Poverty.[7] But as with microfinance, precisely because experimentation is ascendant, the public may overestimate its power. Consider: would a randomized study of the impact of mortgages on borrowing households in the United States in 2005–07 have told the full story of the role of the mortgage industry in economic well-being and progress? No. For that, one should also study the dynamics of the mortgage industry and the financial dynamics of households that take mortgages. This book does both for microfinance.[1] blogs.cgdev.org/open_book.[2] Jain and Moore (2003), 29.[3] Daley-Harris (2009).[4] Nancy Birdsall, the president of the Center for Global Development, where I work, sits on the board of Acción. She is not compensated in this capacity.[5] Chen, Rasmussen, and Reille (2010).[6] Dichter (2006) said it before most others.[7] Karlan and Appel (2011); Banerjee and Duflo (2011).