David Roodman: In Which I Am Exposed As a Double Agent

The following submission is cross-posted from David Roodman's Microfinance Open Book Blog. 

Yesterday, Milford Bateman and I debated. Chuck Waterfield moderated. I’m told the video will be posted later this week. The organizers designated note-takers, and I think their work will be posted too. I’ll let you know. 

It was an intense experience. I think Milford and Chuck and I gave the audience a good show. There was a lot of disagreement, and while it was intense, I don’t think it went ad hominem very much. (I did laugh when Milford cast me as a double-agent, in order to explain why I sometimes say good things about microfinance and sometimes accentuate the negative. As best I can tell, he was expressing the perplexity of someone who sees things in polarities with the writings of someone who doesn’t.)

One bone of contention was the Inter-American Development Bank study The Age of Productivity, which Milford frequently cites. Here’s a key quote:

The root problem of productivity in the region is too many resources allocated to too many small low-productivity companies, and a dearth of middle-level and high-productivity firms. While in the United States 54 percent of firms have fewer than 10 employees, in Argentina, for example, 84 percent have no more than 10 employees. In Mexico and Bolivia, small companies account for more than 90 percent of all firms. The least productive companies tend to be the smallest: a Latin American company with more than 100 employees can generate, on average, double the output with the same resources of a company with only 10 to 19 employees.

Milford takes this as a powerful challenge to a the idea that national economic success can be achieved by stimulating microenterprise through microcredit. I agree.

But from my point of view, there’s a catch. According to my notes, Milford reasonably summarized that conclusion as “more resources should go to formal firms with some capacity for innovation.” I pointed out that that is exactly what support for microfinance does. Microfinance institutions are formal firms with (demonstrated) capacity for innovation. Thus the rise of the microfinance as industry in Latin America fits into the vision of development in this report. Of course, extending the reach of the financial sector to the poor does not constitute a comprehensive and realistic strategy for outsiders to deliver nations from poverty. But then, what does? Let’s keep our standards realistic./p>

If I understood correctly, Milford argued that it was nonsensical for me to argue in my book summary that microfinance has succeeded merely because microfinance institutions have succeeded. The objective of microfinance, he said, is not just to create microfinance institutions but to spur economic development by creating more firms of various sizes. Though I didn’t say this, it seems to me that things don’t have objectives, people do. The people involved in microfinance are diverse and thus bring diverse objectives to their work. Helping poor people manage their money is a worthy goal, like getting them clean water or electricity, and can be done with large, formal institutions dedicated to that purpose. To the extent that this does not substantially reduce poverty among clients, that should lead us to limit subsidies for such activities (costs should be commensurate with benefits); but that does not make the activity valueless.

To back my contention that Milford has misconstrued the Age of Productivity, and to exemplify my original doubts about the reliability of his interpretations of evidence, I quoted from an e-mail conversation involving myself, Milford, and Eduardo Lora, the lead economist on the Age of Productivity. Eduardo wrote:

…you have cited our report The Age of Productivity as evidence that microfinance has destructive effects. In regard to this claim, we wish to clarify that at no place in the publication is there a reference to microfinance’s having a negative effect on poverty reduction….We would like to ask for your cooperation in avoiding interpretations that do not comport with the spirit of our publication.

(Also see Stuart Rutherford’s equally polite correction of Milford’s interpretation of his work.)

As I recall, Milford immediately discounted Eduardo’s statement as “political.” I.e., it is what Eduardo had to say, not what he thought. But if the lead economist on The Age of Productivity is that prone to obfuscating, should Milford rely so heavily on his work? For me, this is an example of a tendency I noted during the debate, to confidently make attributions about the motives of others and use them to dismiss their arguments.

But I guess that is the sort of thing I would say as someone bent on “solidifying your street cred and career advancement prospects within the microfinance industry”!

Here’s a version of my opening statement.

Since this event is foremost a debate between myself and Milford, I will address my comments primarily to his writings, in a way that will allow my answer to the debate question to emerge.

Milford has described microfinance as a nemesis, a catastrophe. He has written that “the microfinance model helps to deindustrialise and infantilise the local economy.” And he has associated it with 160,000 farmer suicides in India.

That’s strong stuff. In response to that, I’d like to offer a list: my Top Ten Reasons Microfinance is Actually Not the Worst Thing Ever…and offers something worth building on.

1. Failure to live up to impossible expectations is not what matters most. It’s like saying I’m a failure because I’m not President of the United States. The relevant questions for people serious about help the poor have to do with concrete impacts, positive and negative, and costs and benefits, and the practical ways forward.
2. It easy to exaggerate the negatives of microfinance, just as it is to exaggerate the positives. As a matter of common sense, we should discount the most extreme claims on both sides.
3. It is highly speculative to argue as Milford does that microfinance has drawn donors and philanthropists away from other, knowably more effective ways of helping the poor. The fact is that we don’t know that much about what works and what doesn’t, although we are learning more. The big lesson of history is that it is very hard, but not impossible, for outsiders to make a big positive difference.
4. By the same token, I am dubious of the argument Milford makes, at least when made with such confidence, that microfinance has put countries on a fundamentally different and fundamentally worse economic course. The “small loan business” boomed in this country 100 years ago. I would doubt a historian who claimed with certainty that this put the country on a fundamentally different and worse course. The same goes for Bangladesh or Bolivia today.
5. Then there is the econometric evidence. You’ve heard about the randomized studies that have undercut the hype about microcredit as a path out of poverty. They are why I say that the best estimate we have today of the average impact of microcredit on the poverty of clients is zero. But zero is not a negative number. The studies are not showing that microcredit is the financial equivalent of cigarettes. Indeed the study of microsavings in Kenya found that it raised investment and income among women, and their ability to deal with medical emergencies.
6. People need financial services, poor people especially. Imagine your life without them—no bank accounts, no loans to buy a house or an education, no insurance. You probably could not live the life you do. It turns out that poor people need financial services all the more because their financial challenges are that much greater. But being poor, the financial services available to them will all be imperfect.
7. Absolutely microcredit markets overheat, and donors public and private and social investors deserve blame for inflating bubbles. That in my view is why we should put less money into microcredit, globally. But I don’t think that in itself is a compelling argument for abolition. For all the trouble the U.S. and other countries have had with mortgages in the last five years, I don’t think we should get rid of mortgages, or even the for-profit delivery of them. Certainly the financial crisis is a powerful challenge to the neoliberal idea (to use one of Milford’s favorite words) that markets always know best, and a powerful reminder that credit institutions need regulation, so that we can make the most of these unruly beasts. The same goes for microcredit.
8. Microfinance is more than credit. As a movement, microfinance has spread the idea that well-meaning institutions can mass produce financial services for the poor. The Grameen Bank does more savings than credit now, and is not unique within Bangladesh in taking savings. In Bolivia, the first country to have a microcredit crisis, microfinance institutions now hold more than 2 million microsavings accounts, in a country of 10 million. Compartamos is one top life insurers in Mexico, in lives covered. M-PESA, the mobile phone–based money transfer system in Kenya, began as a way to do microcredit over the phone. It grew out of the same movement, historically.
9. Speaking of history, what has really reduced poverty over decades and centuries is industrialization, which has brought jobs—not delivering tiny financial services to poor people. So how is that a defense of microfinance? Milford frequently cites the IDB report, The Age of Productivity. Actually it hardly mentions microcredit. But it argues that governments in Latin America have overemphasized support for small and medium-sized companies and underemphasized support for large ones. Now, what would success look like in the world view of this report? Well, there would be more big companies. What would they make and sell? Breakfast cereal? Cars? Soap? Microchips? Internet access? Would we expect that these big firms would lift their customers out of poverty by selling them soap? No. Would we declare them failures as a result? No. We would recognize their rise as part and parcel of a national process of economics development. And guess what: the microfinance industry fits that mold. The “average microcredit loan” comes from an institution with 9,000 employees. Microfinance institutions sell useful things that we shouldn’t expect to lift people out of poverty. Why then declare them failures while embracing detergent makers as a success?
10. Last, to come back to the question, I think there are many interesting paths to financial inclusion–savings circles, cooperatives, postal banks…I think high-tech methods are particularly promising because of their potential to radically change the economics of delivery. I am particularly hopeful about life insurance since it was the first form of formal insurance taken up by the working classes in the U.K. and U.S. But much of what I just said to tamp down expectations of microfinance goes for these alternative forms. It’s not like there is something vastly better waiting in the wings. So let us not, in giving up on microfinance as a silver bullet against poverty, think that there is a silver bullet to be found somewhere else.