Today’s New York Times had an article about microfinance’s woes:
“Microcredit was once extolled by world leaders like Bill Clinton and Tony Blair as a powerful tool that could help eliminate poverty, through loans as small as $50 to cowherds, basket weavers and other poor people for starting or expanding businesses. But now microloans have met with political hostility in Bangladesh, India, Nicaragua and other developing countries.”
The government of Bangladesh is apparently investigating Grameen Bank (although the “present campaign against Yunus doesn’t ring true” to Kristof); lending has contracted in India; and the president of Nicaragua has urged borrowers not to repay their microloans.
“The hostility toward microfinance is a sharp reversal from the praise and good will that politicians, social workers and bankers showered on the sector in the past decade. (…) But as with other trumpeted development initiatives that have promised to lift hundreds of millions from poverty, microcredit has struggled to turn rhetoric into tangible success.”
I once read — and it is really unfortunate that I can’t remember where I read it, for I would love to properly attribute the quote — that the greatest right in a democracy is the right to say “I told you so.”
This is not a case of schadenfreude. No, really. I think microfinance has the potential to potential to lift some people out of poverty, but not everyone. And the most credible evidence on whether microfinance reduces poverty is not very encouraging for microlenders. As David Roodman wrote, reporting on the Microfinance Impact & Innovations Conference last October:
“An inevitable highlight for me was Esther Duflo’s report on results from a microcredit impact study in Morocco. This is the first randomized test of microcredit in a rural setting, and in a setting that was ‘virgin’ microcredit territory, to boot. The study design was generally similar to J-PAL’s Hyderabad study in that a microcreditor, Al Amana, agreed to randomize the order in which it rolled out its program into new territory.
Take-up was far from universal: 16% of people who could borrow did so. After 24 months, indicators of poverty such as household spending and school enrollment had not budged.”
I joined the Duke faculty in the fall of 2006, roughly nine months after Muhammad Yunus won his Nobel Prize. That semester, I was teaching my development seminar for the first time, and over half of my students wanted to write their term papers about microfinance.
My entire course, however, was (and still is) articulated around the idea that underdevelopment most likely does not have a single cause, a point I made time and again in lecture, to no avail. Most students seemed to think that microfinance was a silver bullet. It got so bad that one of my colleagues jokingly said: “It seems like students want to jump in on the poverty-elimination bandwagon before there are no poor left to help!”
My own view is that the reasoning behind several microfinance schemes is mistaken. Very often, microlenders will justify their activities on the basis of making loans for poor individuals to start businesses.
The truth of the matter, however, is that not everyone is born to be an entrepreneur. Think about your group of friends. How many of them started their own business when they graduated from college? The reason why I am an academic is because I didn’t want to follow in my parents’ footsteps, own my own business, and have to contend with uncertainty over market forces.
Like Michael Kremer once famously said: “Development goes through a lot of fads. We need to have evidence on what works.” Could we be witnessing the end of yet another development fad?