Results for “microcredit”
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Dynamic effects of microcredit in Bangladesh

By Khandker and Samad, there is now a new study of microcredit and it has a much longer time horizon — twenty years — than the previous “gold standard” studies.  It also finds more positive effects than many of the other treatments:

This paper uses long panel survey data spanning over 20 years to study the effects of microcredit programs in Bangladesh. It uses a dynamic panel model to address a number of issues, such as whether credit effects are declining over time, whether market saturation and village diseconomies are taking place, and whether multiple program membership, which is rising as a consequence of microcredit expansion, is harming or benefiting the borrowers. The paper makes the following observations:

  • Group-based credit programs have significant positive effects in raising household welfare including per capita consumption, household non-land assets and net worth;
  • Microfinance increases income and expenditure, the labor supply of males and females, non-land asset and net worth as well as boys’ and girls’ schooling;
  • Microfinance, especially female credit, reduces poverty;
  • Past credit has a higher impact on income and expenditure than current credit;
  • With higher village-level aggregate current male borrowing, the marginal effect of male borrowing on per capita income gets lower.

The paper concludes that the current microfinance policy of credit expansion alone may not be enough to boost income and productivity, and, hence, sustained poverty reduction.

There is a useful write-up of the paper from The Economist.  In sum, we should up our estimate of the efficacy of microcredit.

The Father of Microcredit

You’ve heard how microcredit was born. In a nation long shackled by British rule and wracked by famine, a brilliant man was seized with a desire to strike a blow against the poverty all about him. Defying common sense and the skepticism of his colleagues, he began lending tiny sums out of his own pocket to poor people, which they were to invest in tiny businesses. He demanded no collateral, only the vouchsafe of the borrowers’ peers. The borrowers rewarded his faith with punctual repayment. In time, his experiment spawned a national movement that delivered millions of loans to poor men and women and broke the power of money lenders.

The hero of this story is…Jonathan Swift, author of Gulliver’s Travels.

Swift developed the main ideas of microcredit–small sums, co-signers on the loan who knew the recipient, loans to women–in the 1730s.  Although the system did not grow large in his lifetime, by the 1840s Irish microcredit institutions served a fifth of the population of Ireland.

The quote and information are from David Roodman’s excellent book Due Diligence: An Impertinent Inquiry into Microfinance. Roodman is a  remarkable scholar, equally at ease collecting information in the slums of Bangladesh as writing complex computer code, and Due Diligence is a very good book not just on microcredit but on development more generally.

(Loyal readers may recall that Tyler also noted Swift’s connection to  microcredit in a post from 2006.)

The microcredit paradox

Felix Salmon surveys some of the recent trouble in India.  The dilemma behind microcredit is simple.  Let's say the interest rate is, annualized, fifty percent a year (not atypical) and that a family is borrowing on a regular basis.  The debt payments can suck through their resources fairly rapidly, even if they are using the loans for valuable purposes, such as bringing the kid to the doctor.  It all works fine if the family earns more than fifty percent liquid return, annually, on its marginal capital investment.  How often is that the case?

Another scenario is that the borrowing allows the employment of another family member and thus it is self-financing for a good while but not forever.  Eventually the "rate of change" effect overtakes the higher income level from the extra job.

How many decent-sized regions have rates of return above twenty percent?  How many have micro-credit rates below twenty percent?

Nonetheless banning micro-credit is a mistake because the alternative is the moneylender, who charges an even higher rate of interest, and sometimes a kid who doesn't get to visit the doctor.  The lesson is that escaping poverty is very difficult.

My charitable giving advice from 2007

I had a chapter on this topic in my 2007 book Discover Your Inner Economist, with much of the material based on blog posts from 2004-2006 or so.  No, I was not recommending particular charities, but rather considering how to think about giving more generally.  Since that time there has been so much discussion of the topic in EA communities, I thought it would be interesting to see how well my earlier recommendations have held up.

I argued for the following:

1. Do not give money to beggars, it only encourages rent-seeking for further transfers.

2. Accordingly, many donations should be surprise donations.  In the meantime, limit the ability of people to invest resources in donation-seeking.

3. Give to causes where your giving will have a positive contagion effect upon others.

4. The promise of matching grants is not always very effective in stimulating larger donations.

5. Many forms of ostensible charity in fact have negative effectiveness.  For instance parachuting for charity can lead to a good number of injuries and not bring much positive attention to the charitable cause, at least not relevant to alternatives.

6. I endorse cash transfers, provided you don’t encourage people to work too hard to receive them.

7. There is a cautious endorsement of micro-credit.

8. A fundamental problem is that a lot of giving is driven by motives of affiliation rather than effectiveness.

#8 seems more true than ever before and it is now widely recognized.  #3, while discussed in the current literature, still seems an undervalued point.

On the revisions, microcredit has lost some status since that time, though it still seems modestly effective and it has the further virtue of being self-sustaining.  Cash transfers remain a popular and reasonably effective option, although a) sometimes they are much more effective with mentoring, b) some recent Chris Blattman results suggest they may wash out in the longer run, and c) sometimes cash transfers raise expectations without making the recipients happier in the longer run (a recent paper measures this, does anyone have the link handy?  From Ariella, link is here).

Overall I overrated the dangers of charitable rent-seeking, and underrated the dangers of the bureaucratization of altruism?  In any case, it was interesting to go back and read my earlier thoughts on the question.

What I’ve been reading

1. David Thomson, A Light in the Dark: A History of Movie Directors.  One of the best attempts to make the auteur notion intelligible to the modern viewer, he surveys major directors such as Welles, Kubrick, Hitchcock, Godard and others.  Stephen Frears is the dark horse pick, and he recommends the Netflix show Ozark.  I always find Thomson worth reading.

2. Wenfei Tong, Bird Love: The Family Life of Birds.  Now this is a great book, wonderful photos, superb analytics and bottom-line approach throughout.  By the way, “Superb fairywrens are particularly adept at avoiding incest.”

3. William Deresiewicz, The Death of the Artist: How Creators are Struggling to Survive in the Age of Billionaires and Big Tech.  Ignore the subtitle (which itself illustrates a theme of the book), this is the best book on the economics of the arts — circa 2021 — in a long time.  “The good news is, you can do it yourself.  The bad news is, you have to.”  Every aspiring internet creator, whether “artist” or not, should read this book.  If you don’t think of your career itself as a creative product — bye-bye!

I very much enjoyed Richard Thompson (with Scott Timberg), Beeswing: Losing My Way and Finding My Voice, 1967-1975, still smarter than the competition and you don’t even have to know much about Thompson.

Dorothy Sue Cobble, For the Many: American Feminists and the Global Fight for Democratic Equality is a serious and thorough yet readable account of what the title promises, with a minimum of mood affiliation.

Joanne Meyerowitz, A War on Global Poverty: The Lost Promise of Redistribution and the Rise of Microcredit. A history of antipoverty efforts, with an emphasis on the shift toward “enterprise” in the 1980s, with the microcredit treatment being mostly pre-Yunus.

Mathilde Fasting has edited After the End of History: Conversations with Frank Fukuyama.

Julian Baggini’s The Great Guide: What David Hume Can Teach Us about Being Human and Living Well is not written for me, but it is a lively and useful introduction to one of humanity’s greatest minds.

Don’t forget Deirdre Nansen McCloskey, Bettering Humanomics: A New, and Old, Approach to Economic Science.

Arrived in my pile there is William D. Nordhaus, The Spirit of Green: The Economics of Collisions and Contagions in a Crowded World, and in September Adam Tooze is publishing Shutdown: How Covid Shook the World’s Economy, and also for September there is Gregg Easterbrook’s Blue Age: How the US Navy Created Global Prosperity — And Why We’re in Danger of Losing It.

Have you noticed there are lots of books coming out now?  How many were held over from the pandemic?

Esther Duflo reminiscenses

I first contacted Esther (and Abhijit) in 2006, when I wanted to write a New York Times column on their RCT work in India, specifically Hyderabad.  They were both extremely welcoming of my inquiries and did everything possible to give me a chance to observe their work up close.

I ended up traveling to Hyderabad, India, and spent a whole day with their RCT program in the field.  Annie Duflo, Esther’s sister, was gracious enough to travel with me around the city for an entire day, visiting the meetings where the women would show up to receive loans, and talking with the loan suppliers.  Overall I was astonished at how well-organized the work was, and how sophisticated the on-the-ground implementers were.  This was really work very carefully done.

Then, in 2013, seven years later, Banerjee and Duflo and co-authors Glennerster and Kinnan created a paper with the core results from the experiment, here is one version of the abstract:

This paper reports results from the randomized evaluation of a group lending microcredit program in Hyderabad, India. A lender worked in 52 randomly selected neighborhoods, leading to an 8.4 percentage point increase in takeup of microcredit. Small business investment and profits of pre-existing businesses increased, but consumption did not significantly increase. Durable goods expenditure increased, while “temptation goods” expenditure declined. We found no significant changes in health, education, or women’s empowerment. Two years later, after control areas had gained access to microcredit but households in treatment area had borrowed for longer and in larger amounts, very few significant differences persist.

Along with some (broadly consistent) results from Dean Karlan, this became one of the definitive papers on the effects of micro-credit.  It meant that micro-credit is OK, but not the cure for poverty.  That had a big subsequent impact on both policy and philanthropy.

You might have thought they would rest there, but no, they kept on looking at the data more deeply and over additional years, hoping to learn yet more from the experiment.  And just this last week, a new paper came out, modifying the earlier results, based on more years of data.  Here is the new abstract and paper (with Breza and Kinnan):

Can microcredit help unlock a poverty trap for some people by putting their businesses on a different trajectory? Could the small microcredit treatment effects often found for the average household mask important heterogeneity? In Hyderabad, India, we find that “gung ho entrepreneurs” (GEs), households who were already running a business before microfinance entered, show persistent benefits that increase over time. Six years later, the treated GEs own businesses that have 35% more assets and generate double the revenues as those in control neighborhoods. We find almost no effects on non-GE households. A model of technology choice in which talented entrepreneurs can access either a diminishing-returns technology, or a more productive technology with a fixed cost, generates dynamics matching the data. These results show that heterogeneity in entrepreneurial ability is important and persistent. For talented but low-wealth entrepreneurs, short-term access to credit can indeed facilitate escape from a poverty trap.

That is a pretty stunning extension of the original results, bravo to all hands involved!  Rust never sleeps, and in the hands of Banerjee and Duflo, neither does science.

Libra as a medium of exchange

I’ve already outlined the case for how Libra might be able to significantly lower the 7-8% costs and commissions currently charged for making remittances.  That would make Libra a widely used means of payment.  I am less optimistic, however, about Libra being widely used as a medium of exchange.

Let’s say the core rate of inflation in a country is eight percent, which is about the current rate of price inflation in Myanmar.  It is still not the case that an unbanked farmer holds currency for the entire year (he is more likely to buy land or animals as a means of large-scale saving).  I am not sure what monetary velocity is for this group of people (readers?), but say currency turns over four times a year on average.  That is in essence a two percent tax on currency holdings, not an eight percent tax.  I don’t think that individuals will switch monies for such a small gain, noting that decreasing their demand for money (i.e., increasing currency velocity) is another possible response.

If an unbanked farmer is in debt, I would think the velocity of currency would be well over 4x a year (consider monthly microcredit borrowings and repayments), although certainly some MR readers can enlighten us here.

A few decades ago, when inflation was much more common, it was generally believed that people were not very interested in switching monies until inflation rates hit about forty percent.  I am not sure if that same number would hold today, but of course that is pretty high.  Furthermore, the countries with the highest inflation rates, such as Venezuela, can be impossible to do business in.

Don’t forget that Libras are specified as paying zero nominal interest throughout.

You might think that Libras have some advantages over current e-monies and smart phone banking systems.  It is hard to make that judgment for a product which does not exist yet, but it is unlikely those advantages will run close to the range of seven to eight percent.

For those reasons I am more optimistic about Libra as a means of payment — most of all for remittances — than as a general medium of exchange.

*Experimental Conversations*

The editor of this truly excellent book is Timothy N. Ogden, the subtitle is Perspectives on Randomized Trials in Development Economics, and the contributors include Angus Deaton, Dean Karlan, Lant Pritchett, David McKenzie, Judy Gueron, Rachel Glennerster, Chris Blattman, and yours truly, with a focus on randomized control trials and other experiment-related methods.  Here is one bit from the interview with me:

I would say that just about every reputable RCT has shifted my priors.  Literally every one.  That’s what’s wonderful about them, but it’s also the trick.  You might ask, “why do they shift your priors?”  They shift your priors because on the questions that are chosen, and ones that ought to be chosen, theory doesn’t tell us so much.  “How good is microcredit?” or “What’s the elasticity of demand for mosquito nets?”  Because theory doesn’t tell you much about questions like that, of course an RCT should shift your priors.  But at the same time, because theory hasn’t told you much, you don’t know how generalizable the results of those studies are.  So each one should shift your priors, and that’s the great strength and weakness of the method.

Now, you asked if any of the results surprised me.  I think the same reasoning applies.  No, none of them have surprised me because I saw the main RCT topics to date as not resolvable by theory.  So they’ve altered my priors but in a sense that can’t shake you up that much.  If you offer a mother a bag of lentils to bring her child in to be vaccinated, how much will that help?  Turns out, at least in one part of India, that helps a lot.  I believe that result.  But 10 years ago did I really think that if you offered a mother in some parts of India a bag of lentils to induce them to bring in their kids to vaccination that it wouldn’t work so well?  Of course not.  So in that sense, I’m never really surprised.

And this:

One of my worries is RCTs that surprise some people.  Take the RAND study from the 1970s that healthcare doesn’t actually make people much healthier.  You replicate that, more or less, in the recent Oregon Medicaid study.  When you have something that surprises people, they often don’t want to listen to it.  So it gets dismissed.  It seems to me that’s quite wrong.  We ought to work much more carefully on the cases where RCTs are surprising many of us, but we don’t want to do that.  So we kind of go RCT-lite.  We’re willing to soak up whatever we learn about mothers and lentils and vaccinations, but when it comes to our core being under attack, we get defensive.

I very much recommend the book, which you can purchase here.  Interviews are so often so much better than just letting everyone be a blowhard, and Ogden did a great job.

Friday assorted links

1. Rachael Meager has new and very high quality evidence on microcredit; it’s good but not great and sometimes possibly zero effect in the aggregate.  She is a job market candidate at MIT.

2. “Neiman Marcus Is Selling Frozen Collard Greens For $66 Plus Shipping.

3. Watch a drone hack a room of smart light bulbs from outside the window.

4. “Proponents of the gondola argue that it is far cheaper and quicker to build than a Metro station.”  When it comes to transportation, there is definitely a great stagnation.  ““Just think of it as a Georgetown Metro station,” Sternlieb said.”  Building the system, by the way, would take considerably longer than fighting and winning WWII.

5. Do Nanodegrees (TM!) have a future?

6. I’ve been waiting for someone to call a piece “White Riot,” now it has been done.  The piece has too much posturing, and pandering/moralizing, but on the factual side it has a variety of worthwhile and interesting points.

Systemic financial risk

One of the largest of Haiti’s microcredit groups, Finca Haiti, wrote off almost a third of its portfolio after many clients died in the earthquake or lost their homes and businesses. A staggering 53 percent of its borrowers were late on their payments.

Here is much more, about the difficulties of running a micro-credit system in an economy with a negative real rate of return.

Elsewhere, Ireland expands aid to Haiti.  The cholera epidemic is getting much worse rapidly.

Indian phone call of the day

For the past three years, [Bhumika] Chaturvedi has been a top collection agent at
her call center, phoning hundreds of Americans a day and politely
asking them to pay up. As the U.S. financial crisis plunges Americans
into debt, her business is one of the fastest-growing sectors in Indian
outsourcing. It is also one of the few sectors of outsourcing in India
that is still hiring aggressively.

By the way:

India handles an estimated $16 billion — or about 5 percent — of delinquent U.S. accounts

The responses are numerous:

"My mortgage payments are just too high, honey. I just can’t make the
payment this month," a weeping woman with a Southern accent recently
told her in response to a call for a $200 credit card payment. "I’m
sure y’all heard about the credit crunch and gas prices. I’m flat
broke."

I wonder what the Indian bill collector thinks in these moments.  Has anyone tried saying: "Pay up.  My aunt earns $1300 a year and pays 80 percent interest on her microcredit loans"?  Probably not.  In fact the strategy is the opposite:

Aparup Sengupta, global chief executive officer and managing director
of Aegis, encourages his debt collectors to use a "hospitable Indian
touch," meaning less arm-twisting and more emotional therapy.

"This business is a performing art," Sengupta said. "We are part
therapists because the core of the issue is that every human being
wants to be honorable in life. We don’t just push someone into a bad
situation. We try to create a real solution."

Decorating the office are dozens of yellow smiley faces with the
words, "Happy People. Happy Customers. Happy Investors," along with
other posters that read: "Connect and Collect."

If I owed money I would simply stop answering the phone. 

My micro-credit essay with Karol Boudreaux

From the Wilson Quarterly of this January, here is one excerpt:

For better or worse, microborrowing often entails a kind of ­bait ­and ­switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such ­life­saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the ­alternative–­such as no doctor’s visit for a child or no school for a ­year–­is much ­worse.

The piece attempts to redress many myths of micro-credit.  For instance it is often claimed that micro-credit doesn’t involve collateral, but that isn’t quite true.  The borrowing is done in small groups, and if you don’t pay your share the neighbors come and take away your TV set.  In reality micro-credit takes the collateral-seizing function away from the bank and puts it in the hands of our neighbors, thereby increasing loan repayment rates.

My favorite part of the piece is this:

Sometimes microcredit leads to more savings rather than more debt. That sounds paradoxical, but borrowing in one asset can be a path toward (more efficient) saving in other ­assets.

…Westerners typically save in the form of money or ­money-­denominated assets such as stocks and bonds. But in poor communities, money is often an ineffective medium for savings; if you want to know how much net saving is going on, don’t look at money. Banks may be a ­day­long bus ride away or may be plagued, as in Ghana, by fraud. A cash hoard kept at home can be lost, stolen, taken by the taxman, damaged by floods, or even eaten by rats. It creates other kinds of problems as well. Needy friends and relatives knock on the door and ask for aid. In small communities it is often very hard, even impossible, to say no, especially if you have the cash on ­hand.

Under these kinds of conditions, a cow (or a goat or pig) is a much better medium for saving. It is sturdier than paper money. Friends and relatives can’t ask for small pieces of it. If you own a cow, it yields milk, it can plow the fields, it produces dung that can be used as fuel or fertilizer, and in a pinch it can be slaughtered and turned into saleable ­meat or simply eaten. With a small loan, people in rural areas can buy that cow and use cash that might otherwise be diverted to less useful purposes to pay back the microcredit institution. So even when microcredit looks like indebtedness, savings are going up rather than down.

In other words, read Keynes’s chapter 17, go long on animals (liquidity premium exceeds carrying costs), go short on money (carrying costs exceed liquidity premium, at least in poor countries), and increase your future expected net wealth.

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