November 20, 2013
How Microcredit Went GlobalBy Jonathan Morduch
Most of NYU’s development economists are on leave this year (Raquel, Debraj, and Hunt: your colleagues miss you). The regular doctoral sequence and development seminar are on hold for the year. Students walk the halls unsure who to ask about the right way to parameterize intra-village treatment heterogeneity when doing power calculations. Bill Easterly and Yaw Nyarko are holding the fort, though, and they pulled off a standing-room-only annual Development Research Institute conference on Friday, November 15. It was a reminder of what makes NYU such an interesting place to study development.
Takeaways: The history of European settlement made more difference than we thought to global patterns of growth (and still does). Autocrats like Deng Xiaoping and Lee Kuan Yew made less difference than we thought. And you can thank shrewd entrepreneurs in Ghana for helping meet your chocolate cravings.
Bill and Yaw tapped me to deliver the keynote. They figured I would deliver a stem-winder, or at least say something intelligible about microcredit. I tried to take the latter route.
The theme of the conference was “Beyond the Nation.” The idea was to look at economic forces that encompass broad regions – or that only touch parts of a country but not the whole. I focused on a poorly-told part of the microcredit story, one that I’ve been chewing on for the past decade. How did microcredit build from a series of small initiatives into something that spans the world, wins big prizes, fuels crises, inspires social entrepreneurs, social investors, and others attaching “social” to their job descriptions?
The story has two parts. One is that microcredit networks played a big role. That’s you: Women’s World Banking, Accion, SEEP, Pro Mujer, Freedom from Hunger, Grameen Foundation, (and these are just some of the more well-known networks based in the US). The spread of microcredit is often told as a story of decentralized replication. (Mohammad Yunus has a great idea, I think I’ll visit Bangladesh and then try it at home.) But the reality is that little would have been possible without organized action by networks over many years. The cluster of global networks attracted money from donors and used it to provide public goods (communications, product development), club goods (HR systems, MIS development), regulatory lobbying, and appropriate funding structures. This was the key to achieving one of the very biggest (and still underappreciated) accomplishments of microcredit: the development of locally-embedded organizations that could reliably deliver services over the long haul and that could be accountable to investors and donors. The networks provided critical management inputs in Latin America, Africa, and Asia. Just as the structure of microcredit contracts helped solve the problem of lending to poor households, the networks helped solve the problem of lending to (or investing in) MFIs.
The other part of the story has been a running theme in recent talks: that microcredit was successful because it had a great story to tell. But now that story has become a constraint. It veers too far from reality, and keeps us from seeing how microcredit really works. The familiar story of microcredit is about providing capital for small-scale entrepreneurs. But a truer depiction is that microcredit succeeds because it is often structured like consumer finance and – not surprisingly – often gets used for consumer finance. It’s not that borrowers don’t have businesses, but that the immediate need for finance may not be for business. Money may be needed for a big ticket purchase, a health emergency, or, say, to pay down an expensive loan. Money is fungible, so using microcredit for those uses could free up funds for business uses later. And, by the same token, using microcredit for business purposes can free up funds for consumer finance. By this reckoning, the beauty of microcredit is that it can be used for lots of purposes, taking advantage of the fungibility of money. That’s not the story that microcredit providers usually tell, since the pitch that these are “all business loans, all the time” has been a winner. But if we want to build from the first decades of microcredit – and to go from serving 200 million customers to serving 2 billion – we need to tell new stories. After all, unlike the first microcredit customers, the next wave of customers are much more likely to live in cities and to not have businesses at all.
Photo credit - ©NYU Photo Bureau: Gallo