Last week, Innovations for Poverty Action’s SME Initiative brought together researchers and practitioners to discuss recent research on SMEs (Small and Medium Enterprises), mostly in the developing world.
Why the growing interest in SMEs? Partly it’s a reaction to the murky results on the impacts of microfinance. Evidence is increasingly suggesting that microenterprises do not tend to grow much and their impacts on income and consumption are up for debate. Against that, supporting SMEs may be a more effective way to provide jobs and reduce poverty.
Given that, what struck me most about the conference is not what was discussed, but what was not discussed. Many big-picture questions that underlie the focus on SMEs were not explicitly raised . . .
Read MoreThe evidence on financial education has, to date, not been encouraging. As Cole and Zia write in Chapter 14, being financially literate clearly helps, but the value of financial education is a different question. We know the desired outcome (literacy) but not a reliable way to get there enough of the time, nor is it clear that literacy is enough. Behavioral economics teaches us that consumers also need ways to implement ideas, especially when temptations and distractions are difficult to keep at bay.
Intuition that improved financial decision making through training would have powerful effects is strong, and there’s some evidence in that line (e.g., Karlan and Valdivia 2011). So where exactly are existing financial literacy programs going off track? Is it curriculum? Is it delivery? Is it context?
Read MoreIn developed economies, households often use both savings and borrowings to produce large amounts of capital to buy fixed assets like houses and vehicles. House buyers, for example, make a down-payment from their savings and borrow the rest. Saving and borrowing are thus complements in this context.
Behavioral economics provides another mechanism through which saving and borrowing act as complements: for households that are loathe to draw down their hard-earned savings, the ability to borrow–and thus to leave their stash of savings untouched—can function as a helpful way to maintain accumulations. Were households more confident in themselves, or if they had better mechanisms to achieve discipline, “borrowing to save” would be less useful, but in an imperfect world it can be the best of an array of imperfect strategies (Morduch 2010).
In other contexts, borrowing and saving are depicted as alternative activities . . .
Read MoreCredit is just one useful financial service, but credit has been the first focus of microfinance institutions because there’s a business model that makes lending possible, not because it is necessarily most important for customers. Customers pay handsomely for access to credit. Regulations also often make it much easier to lend than to take deposits (since the risk rests with the lender).
Saving programs have emerged, and some advocates now claim that deposit services deserve claim to being the most fundamental need for poor families – and for the poorest specifically. But the picture developed by Collins et al (2009) pushes against that view. We argue that a range of financial devices are sought and used together, with different degrees of substitution and complementarity. None have clear primacy . . .
Read MoreIf micro-businesses tend to stay micro, perhaps there are better options? Critics of the hoopla around microcredit suggest that job creation is better done by larger enterprises (e.g., Karnani 2007). The rush to support small and medium enterprises (SMEs) has been given attention by the G-20 countries and is tied in part to the idea that SMEs can contribute to the goal of poverty reduction by employing low-skilled workers. But can they? It’s an empirical question which has been met with little evidence so far.
Bauchet and Morduch investigate data on the employees of SMEs supported by BRAC Bank in Bangladesh. Their conclusion is that these employees are far more educated and skilled than microcredit borrowers; in line with this, SME employees come from households that are considerably less poor on average. And they tend to be men, while microcredit borrowers in Bangladesh are mainly women. In sum, the two groups – SME employees and microcredit borrowers – look very different in the Bangladesh surveys. Will these kinds of results hold up elsewhere, particularly in Latin America and Eastern Europe where the gender and education profiles of microcredit borrowers is different from that in South Asia?
Read MoreIn the large microfinance markets of Asia, a common but seldom-discussed observation is that the microenterprises nominally tied to microcredit borrowing rarely grow substantially, especially after the first few years. There are many possible reasons to explain this, including borrowers’ simple lack of imagination, lack of management capacity, low profitability at scale, limited ability to hire trusted workers, risk aversion, lack of access to sufficient capital for productive growth investments, poor policy environments, and insufficient access to larger markets.
What role do financial institutions play? Making microcredit loans more flexible may help – though microfinance institutions worry that being more flexible may increase risk and costs. The lack of growth may also be due to competing household needs like childcare. Even if financial access makes a big impact at first, the long-run impact hinges on the extent of continuing gains
Read MoreLast week I caught up with David Roodman who was on his way to an NYU screening of The Micro Debt, a documentary on microfinance by Tom Heinemann. Heinemann sent me the DVD a while ago, but I hadn't watched it yet so I tagged along.
Heinemann is a muckraker, a trouble-maker, a Danish Michael Moore -- especially in the scenes where his camera crew tries to corner Muhammad Yunus (unsuccessfully) at an industrial fair in Spain.
The film is an unrelenting indictment of the microfinance sector, the Nobel Committee, and Yunus. Heinemann distorts and sensationalizes, and he does a grave disservice to Grameen Bank and Yunus. In a now-resolved matter, Heinemann accuses Yunus of massive financial improprieties involving a $100 million tax dodge. Worse, the film pins a series of borrower suicides on alleged strong-arm tactics of Grameen Bank . . .
Read MoreLast week, FAI asked: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers? Today, the series continues to probe for insights into the questions we need to ask in order to make informed decisions on how to improve financial access.
Question 2: How much does consumption smoothing contribute to the welfare of families?
There are clear theoretical linkages between consumption smoothing, financial access, and improved wellbeing. Modern economics is built around the premise that households seek to maximize utility, not income. A core economic task of a household, rich or poor, is matching the availability of resources with the timing of consumption needs. This task is especially burdensome for poor households who have to piece together uneven cash flows using a handful of imperfect financial tools. A key role of access to predictable, reliable and convenient financial services is thus be to smooth consumption . . .
Read MoreHigh quality evidence on the state of financial access around the world is advancing rapidly. A happy consequence of increasing knowledge is the ability to better recognize what we don’t yet know. Today, FAI is launching a series on the ten questions, some micro, some macro, that need answers if we are to make informed decisions on how to improve financial access. These questions will be available as a framing note at the end of the series on the FAI site and later as part of a collection of studies to be published in a forthcoming book.
Question 1: Does financial access--evaluated in typical settings with a long enough time horizon to see change--substantially improve the well-being of customers?
The most fundamental, unresolved question concerns impact. Does expanding financial access really make a notable difference to families and communities? And, if so, how and when?
Read MoreLow-income households are often trapped in a “debt-cycle”: They borrow to cover necessary expenses, repay the loan with their subsequent income, then borrow again because they have nothing remaining after repayment. Inconsistent income and seasonality, especially for farmers, makes borrowing attractive at the time of necessity. However, the associated interest costs may stifle the chances for the borrower to accumulate savings. Piyush Tantia from ideas42 discusses the case study, "Turning Interest into Savings," which describes the design, implementation and results of piloting a debt-to-savings product in India . . .
Read MoreThis is the second of three posts addressing the standard critiques of RCTs. In the last post I addressed the External Validity Critique. In this post I’ll take up the Transcendental Significance Critique—or put a different way, the “It doesn’t matter anyway” critique. In the final post in the series, I’ll discuss some of the problems of interpretation and implementation of findings from RCTs.
The Transcendental Significance Critiques takes several different forms. One is evident in my interaction with Eric Meade on the Stanford Social Innovation Review Blog. This version suggests that RCTs don’t effectively shed light on a grand epistemological view of poverty and social change (this is a different from a critique about theory-less RCTs, a different topic entirely). Another version suggests that RCTs are irrelevant because they cannot be used to measure what really matters—which isn’t foreign aid or charitable programs. In Angus Deaton’s version of Transcendental Significance Critique focuses on national policy and broad development initiatives which can’t be field tested. Philip Auerswald’s version keys on entrepreneurship and economic dynamism which he believes are the real drivers of development and change. Finally, there is a version of the critique which focuses on the static nature of any field experiment. The results of an RCT only tell you about a particular moment in time, and usually well after that moment in time has passed. This critique argues that the world is so dynamic that moment in time snapshots are not useful . . .
Read MoreWithin development and philanthropy circles, there seems to be a cycle of critique of randomized control trials in operation. Every few months a variety of posts and articles pop up discussing the limitations of RCTs attempting to make the point that RCTs are overhyped or at least substantially less useful than proponents assert.
For instance, Philip Auerswald, an economist at George Mason University who focuses on entrepreneurship, rehashed—though in slightly different form—some of the standard critiques this past week. After engaging in discussion in the comments on Phil’s site I thought it might be useful to address some of these common critiques in a more public and visible space.
The most important point to make up front is that RCTs do have limitations. They are by no means a perfect instrument even theoretically; there are also serious practical limitations in the way RCTs are deployed, reported and interpreted. The second most important point is that most of these limitations are shared by the alternatives to RCTs. I am most frustrated by critiques of RCTs that do not acknowledge this . . .
Read MoreU.S. poverty-watchers have long expected another uptick in the poverty rate, and on Tuesday the Census put numbers to that (correct) expectation: 46.2 million Americans fell below the federal poverty line in 2010, a full 15.1% of the population. That marks the third annual increase in the poverty rate. In 2009, 14.3% of Americans were in poverty; in 2008, 13.2% were.
For a real-world sense of what that means, consider that in 2010, the federal poverty line for a family with two adults and two children was $22,113.
This, of course, is the continued impact of the Great Recession. The recession may have “ended” in June 2009, but the unemployment rate is still at 9.1%. We are also now starting to see the waning effects of stimulus spending, which, according to the Center on Budget and Policy Priorities, managed to keep 4.5 million people out of poverty in 2009.
In other words, this story is going to be with us for a long while yet. And so we should be clear about what that story is . . .
Read MoreSome time ago, I had a conversation with a microfinance investor. What is the greatest challenge facing the sector? – I asked. His answer: multiple borrowing – multiple borrowing was getting people into too much debt; multiple borrowing was transforming micro-enterprise lending into consumer finance; and multiple borrowing was rewriting the traditional relationship between MFIs and their clients.
Of course, multiple lending is present in all of these cases. But thinking about multiple borrowing along these lines misunderstands the basic situation. Multiple borrowing isn’t a reflection of some recent or extreme developments to be ascribed to runaway growth, greed, or willing ignorance. Nor is it some foreign element to be excised from microfinance. No, multiple borrowing is an intrinsic part of the practice, one that has been with us for years. Nor, despite press articles to the contrary, is it a result of heavy market penetration, or even saturation.
This is a realization I came upon during a recent trip to Haiti . . .
Read MoreA lot of today’s research is focusing on tweaks to financial contracts and marketing with the aim to improve take-up and impact. The grail is big gains generated by small changes.
But big impacts often require much more than tweaks. That’s especially true for mobile money, in which scale and interconnectedness really matter.
Mobile money systems seek to create an ecosystem within which money is passed around and stored in electronic form. It’s hard to get such an ecosystem going, but M-PESA in Kenya shows us how once it gets big enough it can become a powerful snowball. Critical mass thresholds are associated with two types of transactions that are particularly problematic . . .
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Editor's Note:
If you were hoping that the faiV would be a pleasant distraction from the overwhelming flow of AI-related content, sorry. For the record, the faiV had “ai” built in before Anthropic existed. And a housekeeping note: we’ve finally jumped ship from Mailchimp to NYU’s mailing platform—I guess if you’re reading this it’s been a seamless transition and if you’re not, well, you’re not. Feedback on the faiV’s content and format and delivery methods is always welcome, just drop me an email.
- Tim Ogden