Saturday, May 23, 2009

Miracle of microfinance

I am excited about this new paper (May 2009) by Banerjee and Duflo, The Miracle of Microfinance: Evidence from a randomized evaluation. 2 months and 3 posts ago, I had just posted about these two star MIT development economists. This new paper is presented on the Poverty Action Lab (J-Pal) site, and J-Pal is about as good as it gets for economic research on poverty.

Here is a very short summary of this paper – a summary clipped from a summary by the Private Sector Development (PSD) Blog:

the first large-scale randomized trial of access to microfinance"

microcredit does have important effects on business outcomes and the composition of household expenditure

microcredit … appears to have no discernible effect on education, health, or women's empowerment … in the short term (within 15-18 months)

Here is my first reaction after only skimming the paper and reading the PSD review:

  1. Microfinance is not a miracle.

    We don't need a scientific paper to say microfinance is no miracle. The fact that there are positive business outcomes after 15-18 months is great. The fact that people aren't smarter, healthier, and more egalitarian … normal. Maybe some people have been parading for some time as though microfinance were a miracle, there have been many such miracles in the past, disappointing panaceas for the developing world that have surged and failed. A point that Banerjee and Duflo would likely support is that there are also many development solutions that have come and gone untested by academic rigor. That is where I am very happy to read this new paper. But let's read it for the rigor, not for miracles dispelled. We're agreed on the miracle point.

  2. PSD post: "The verdict is in on microfinance."

    The first large-scale randomized trial is in. I wouldn't say that's the verdict. The best part about this PSD post is that the first sentence after the "verdict is in" is: "And it's not pretty." What? Positive business outcomes, uncertain social effects after 15-18 months of opening a new microfinance branch in a slum. How pretty are we looking for? We've seen 50 years of development efforts leave much of Africa poorer, I think we can give microfinance a little more than 15-18 months to see sweeping social change.

Ok, microfinance is a tool to alleviate poverty in a way that is sustainable and respects human dignity and responsibility. It's not a miracle answer, and the verdict isn't exactly in regarding its overall effectiveness. That being said, I'm excited about this new paper. I guess I should read it now.

No comments:

Post a Comment