Transcript Evaluating the Developmental Impact of Microfinance

Evaluating the Developmental Impact
of Microfinance: How to always
produce a positive evaluation by
deliberately ignoring the downsides
Milford Bateman
University of Juraj Dobrila Pula, Croatia
3ie-LIDC Symposium: Does microfinance lift people
out of poverty?
Wednesday 29th June 2011
17:30 to 19:00, John Snow Lecture Theatre, LSHTM,
Keppel Street, London
Microfinance - the early years
• Mainly hype and spin, almost a form of faith healing….
• Yunus argues ‘poverty will be eradicated in a generation’, to
see poverty we have to go to the ‘poverty museum’, etc….
• Donors simply love Yunus’s ‘self-help’ message, so his cause is
up and running regardless of the lack of evidence of impact
• Elsewhere De Soto argues that expansion of informal
microenterprises will resolve poverty in Latin America –
• MFIs and their supporters start to produce their own impact
evaluations, all of which turn out to be very positive indeed!
3 critical missing ‘downside’ factors
• Looking at impact evaluation exercises it is remarkable that 3 major
downside issues have been systematically ignored since the 1970s:
– Displacement, jobs and income lost in non-client microenterprises
– Failure/exit, quick collapse of clients
– Systemic transformation - program impact is simply NOT the same as
community/national impact
• Quick aside - how to explain for this serious omission? I think 3 factors….
– Free market ideology, neoliberals desire to show that self-help and
individual entrepreneurship can ‘work’ for the poor, so no need for state
intervention, welfare programs, wealth redistribution, trade unions, etc
– MFIs want to show ‘they work’ in order to get more cash to survive and to
grow
– Individuals in MFIs want to get rich so deliberately choose to inflate
impact in order to get the initial capital, then ongoing funding and later to
shift attention away from their supreme enrichment activities, such as
moves towards an IPO….
1. Displacement
• Displacement is employment and income displaced in nonclients in the same poor community, if high can mean no
NET job or income gains, or even negative impacts
• ‘Fallacy of composition’ – if you can help one basket maker
expand, so why not ask everyone in community to make
baskets to exit poverty? Assume unlimited demand!!
• Very high levels of displacement found in UK in the 1980s in
its quasi-microfinance program Enterprise Allowance
Scheme (EAS), contributing to its demise after only ten years
• Yet still no-one wanted to factor in displacement anywhere
else because it was a major downside factor….why spoil a
good concept with awkward facts!
1. Displacement
• So until very recently all impact evaluations were client-based,
not community-based, so as to avoid having to consider
displacement
• Led to Wal-Mart-like fake grand claims to local employment
generation……local displacement simply ignored!
• Also impact evaluations were artificially made to seem even
better - control group lost business/trade to the new entrants,
so got poorer, so that whatever the new microfinance-assisted
entrants earned looked even BETTER compared to what the
control group earned (which was now less than before)….
• No attempt to establish any local link or causation here!!!
1. Displacement
• Many have raised the issue:
– Jan Breman (2003) and Mike Davis (2006) have long pointed out that displacement is a
critical development barrier and it simply ‘redistributes and subdivides the total volume
of local business between new and incumbents’
– Bateman and Sinkovic (2011) found very high displacement in southern Croatia, saw
no net gains
– Bateman, Duran Ortiź and Sinkovic (2011) found very high displacement in poorest
parts of Medellin in Colombia, no net gains
– Inclusive Cities Project finds high displacement virtually everywhere it works in
developing countries
– Even arch-neoliberal Lawrence Summers understands the problem here, noting that, ‘A
sick economy works very differently from a normal one. (.) When demand is
constraining an economy, there is little to be gained from increasing potential supply’
(FT, 13/6/2011)
• Yet still almost no impact evaluation or mainstream microfinance
researchers willingly look into the issue of displacement/negative spillovers….why?
2. Client failure/exit
• All businesses experience failure, but poverty-push informal
microenterprises fail far more than others (Storey, 1994)
• For example, studies by World Bank in Bosnia and Abraham George in
India show very high level of failure - 50% of new microenterprises fail in
first year in Bosnia, in India only 2% are still in business 3 years later
• The problem here is that failure contains the potential to plunge the poor
into deeper and irretrievable poverty
• The original microloan is repaid by drawing down other financial,
economic, physical, social and reputational assets, making an individual
poorer. High repayment rate does not mean poverty reduction…..
• Also, many take out MORE microloans in order to repay an earlier
microloan that cannot be repaid when the business it established failed –
this is a problem in Andhra Pradesh today and in Bangladesh too
• So failure/exit may mean a descent into much deeper poverty, so how can
we justify avoiding to look further into it?
2. Client failure/exit
• Very common until recently for impact evaluations to quite
fraudulently choose only ‘successful’ clients to evaluate
impact – failures/exits simply ignored, leads to ‘survivor bias’
• OK, some say it is difficult and expensive to find those who
failed, and anyway socially awkward for researchers to hear
their tragic stories
• But this is like Caesars Palace casino in Vegas choosing
mainly jackpot winners to interview when determining if
gambling is a good poverty reduction strategy
• Latest bad example – Freedom from Hunger ‘Human Faces
of Microfinance Impact’ – chose 167 ‘long-standing clients’ to
interview, no exits or drop-outs were considered…..so why
are we surprised when the conclusion arrived at was that
microfinance can have an important impact on poverty….
2. Client failure/exit
• Some impact evaluations simply extol the immediate benefits
of new microenterprise entry without thinking of the high
probability of future failure and impact..
• New entry now is always classified as ‘a good thing’
(Banerjee, Duflo, Glennerster and Kinnan, 2009) without any
mention of the fact that most are marginal and so will
inevitably fail – new entry is not an impact itself, it is simply a
possible, but certainly NOT inevitably effective, means to
an end (poverty reduction)
• This trick is sometimes called a ’10th floor evaluation’ – will
someone survive a fall from 20 stories? Ask them on the 10th
floor as they wizz past – they mutter ‘so far, so good’ so you
conclude that an individual can indeed survive such a fall!
3. Systemic transformation
• Program impact is not the same as systemic/community impact
• Needs theoretical framework to show how program impacts on
initial conditions associated with sustainable development
• La Porta and Schliefer (2008) show it is largely a myth that
informal microenterprises constitute a ‘seedbed’ for future
SMEs….most formal SMEs started formally and fairly big too
• ‘Dumpster diving’ in the USA can be supported and made
better for the urban poor, but not many would claim it resolves
poverty….yet this link is precisely what is claimed in
microfinance!
• Lets be realistic - local industrial policy shows need for growthoriented, innovative, non-local demand-focused enterprises
with scaling-up technology potential
3. Systemic Transformation
• Chang (2010) points out that Africa has a superabundance of entrepreneurs compared to developed
economies
• Yet so many donors today are chasing yet MORE of an
increase in the numbers as if this will eventually succeed
• Key problem in Africa is instead that this largesse is not
embedded within an institutional structure that can
facilitate transformational outcomes
• Chang argues that constructing efficient state/collective
‘institutional capability’ is the most important outcome we
want from enterprise development programs…not simply
‘more microenterprises’….
3. Systemic Transformation
• But how to evaluate whether or not the growing
population of microenterprises possesses ‘systemic
transformation capability’?
• Perhaps look at capacity to link? – clustering,
networking, supply chains, etc……
• Perhaps look at non-local market opportunities
obtained?
• Perhaps look at productivity growth possibilities? IDB
‘Age of Productivity’ (2010) proposes ‘Productive
Development Policies’ to support such enterprises
Conclusion
• It is accepted that microfinance impact evaluations have in the
past been extremely dodgy, if not outright fraudulent exercises
• Important downside factors routinely omitted in order to beef up
the impression of positive impact, thereby to keep the
donor/commercial funds flowing and senior MFI staff private
enrichment plans on course…
• Urgent need now to centrally incorporate these downside
factors into impact evaluations in future if we want valid impact
results
• Almost all of the voguish new RCTs have not factored in these
downsides so, contrary to growing opinion, are not much good
• Danger exists that we might now show that microfinance has a
very negative impact – but let us not be afraid of the truth!
Thanks for listening!
You can contact me at:
[email protected]