Microfinance and the Market Test

Here's the end of Rich Rosenberg's new review of Portfolios of the Poor:

Hundreds of millions of poor people “vote with their feet,” demonstrating how much they value microfinance by flocking to it in droves when it becomes available, and most especially by repaying loans faithfully again and again when the predominant motive to repay is not collateral or even group pressure but rather their desire to keep future access to a valued service.It may turn out that a year-long microloan doesn’t improve income as much as a year of women’s primary education or other social services. But the robust value proposition behind microfinance is not that each “dose” is more powerful, but rather that each dose costs much less in subsidies. Social programs like primary education and health care usually require large continuing subsidies, using up scarce tax dollars year after year. Microfinance is different: when it is done right, relatively small up-front subsidies lead to permanent institutions that can continue providing services year after year with no further subsidy needed, and expand those services to reach many millions of low-income clients who badly want them. (This, by the way, is not an argument for microfinance. It’s an argument for microfinance done right.)

In the conceptual framework for my book, this is akin to the institutional development definition of success: If a microfinance institution is growing, competing, innovating, winnings thousands or millions of clients, creating jobs---isn't that the essence of economic development? You can see this view also in Elisabeth Rhyne's letter to the editor in response to last week's Boston Globe article. I will analyze the success of microfinance in this perspective in chapter 8---my next task. I think this viewpoint deserves more attention than it gets, even as I am mindful that one can't ignore impacts on clients (otherwise, we should hail the global success of the tobacco industry as a boon for the poor).I agree with Rosenberg that Portfolios of the Poor is a great book. In my set-up, it speaks more to chapter 7, on the the ways in which microfinance enhances and restricts freedom. In my own review of the book, I wrote about what I learned from it (e.g., for the poor, microfinance is distinctive in its reliability) and what I wanted to read more about (e.g., roles of men and women within the household in the decisions studied in the book).