This paper reports on the first randomized evaluation of the impact of introducing the standard microcredit group-based lending product in a new market. In 2005, half of 104 slums in Hyderabad, India were randomly selected for opening of a branch of a particular microfinance institution (Spandana) while the remainder were not, although other MFIs were free to enter those slums. Fifteen to 18 months after Spandana began lending in treated areas, households were 8.8 percentage points more likely to have a microcredit loan. They were no more likely to start any new business, although they were more likely to start several at once, and they invested more in their existing businesses. There was no effect on average monthly expenditure per capita. Expenditure on durable goods increased in treated areas, while expenditures on “temptation goods” declined. Three to four years after the initial expansion (after many of the control slums had started getting credit from Spandana and other MFIs), the probability of borrowing from an MFI in treatment and comparison slums was the same, but on average households in treatment slums had been borrowing for longer and in larger amounts. Consumption was still no different in treatment areas, and the average business was still no more profitable, although we find an increase in profits at the top end. We found no changes in any of the development outcomes that are often believed to be affected by microfinance, including health, education, and women’s empowerment. The results of this study are largely consistent with those of four other evaluations of similar programs in different contexts.
A new working paper (older, ungated copy here) by Duflo et al. The emphasis is mine.
This is consistent with another careful study (link opens a .pdf file) by Crépon et al. of the impact of microfinance in Morocco, where there authors also find that microfinance has no discernible impact on the usual development indicators (i.e., consumption, health, education, etc.)
To be sure, microfinance does appear to have some impacts, as the abstract above indicates — just not the miraculous impacts that are often touted by microfinance advocates.
Spoken Like a True Development Economist
That’s computer scientist Jaron Lanier, who coined the term “virtual reality,” explaining his view that the Internet has destroyed the middle class, in an article on Slate.
Though I’m not sure that the argument that “great stagnation” arguments of the type made by Lanier, which posit that technological change brings increased unemployment, hold much water (thousands of years of technological change seem to indicate otherwise), Lanier’s comment about informal economies is spot on.
Development economists and law-and-economics scholars know the serious inefficiencies that go hand-in-hand with informal economies all too well. Here is one of my favorite articles on those so-called flea-market economies, by Fafchamps and Minten. Here is a whole book by Marcel Fafchamps about the difficulties posed by trying to conduct business in an environment characterized by informality.