Felix Salmon

The great Easterley vs Sachs

debate on whether aid works has now travelled to Tanzania, home of TEDGlobal

2007. William Easterly and Jeff Sachs

weren’t able to make it, it seems, so the conference kicked off with Easterly-by-proxy

Andrew Mwenda. Ethan

Zuckerman was there to hear Mwenda run down the standard Easterly talking

points – but at TED conferences, the points have a way of talking back.

And when Mwenda challenged the audience to name a country where aid had led

to development, Bono, of all people, stood up and named Ireland,

in the days of the potato famine.

Bono was scheduled to speak on Day Two, and he devoted his time not to his

own ideas but to rebutting

Mwenda’s. He came with a video greeting from Angela Merkel,

and said that the Marshall Plan was hugely successful for both the US and Germany.

The same kind of thing can be done in Africa too, he said, getting a standing

ovation. Sachs himself would probably not have done any better.

Back in April, I raised

any, you’d like me to ask him.

FS: Tom, you seem convinced that microcredit doesn’t work.

I can see that once someone comes to that conclusion, they will always be able

to pick holes in studies purporting to show otherwise. But can you give me a

bit of background on how you came to that conclusion in the first place?

And while we’re on the subject of academic studies, I’d like to ask your opinion

specifically of the paper

by Shahe Emran, Mahbub Morshed and Joseph Stiglitz. Is there a case to be made

that small loans can have a catalytic effect on women in many countries, allowing

them to enter the workforce and become economically productive?

TD: Your first question is about the background to my conclusion

that microcredit does not work. But first, let’s tackle the question: "does

not work for what?"

This is usually not asked.

My beef is that microcredit does not work as an engine of economic growth,

nor as a business growth tool, nor as a solution to long term poverty reduction.

These things are what most of its proponents promise and the fact is (and by

the way Stiglitz, Morshed and Emran do not dispute this) micro credit is NOT

an engine of economic growth, NOT a tool for enterprise development, nor has

it proved to play a significant role in serious reduction of poverty. (I make

a rigorous distinction between the loose confusion of terms "poverrty

alleviation" and "poverty reduction" – they are not the same).

What then CAN microcredit do? In what sense can it be said to work? It can

provide an additional push to poor people in the informal sector marketplace

so that they can increase their incomes. But these increases are not significant

in terms of moving people over the poverty line, nor are they permanent or reliable

increases. For example, if 25 women are selling rice in a row along the street

side in a Bangladeshi town, the microloan enables them to increase their stock.

But as the market for rice becomes thus more saturated, the initial shot of

gross income increase begins to wear away. Also since selling rice is a low

barrier to entry activity (anyone can do it) more people can come along to do

it and the more microcredit providers enter this marketplace (the more they

become supply driven rather than demand driven) and the more sellers or rice

are attracted to this area.

There is also anecdotal evidence that microcredit for poor women helps to

empower them since they have cash in hand and thus a degree of purchasing power.

This has been shown, but again only in the short term and in anecdotal fashion.

On the other hand, see the work of Feiner

and Barker at the Univ. of Maine, which suggests that microcredit keeps

women in the informal sector, with its lack of regulation, hazardous conditions,

and where low incomes are the norm, and opportunities to really learn a saleable

skill are absent. Moreover, they point to continuing male control of women,

male co-optation of the microloans, increases in women’s workload, no or little

change in violence towards women, continued education biases against women,

and so on. They conclude that microcredit aimed at women is in the end paternalistic

and thus in a sense harmful.

Now to get to your question about the background for my conclusions. First

I have real experience in this field, which Stiglitz et al do not.

That’s to say, I’ve been on the ground (literally, on my haunches sometimes),

under trees, in the hot sun, in the rain on the side of the road where people

are selling things, talking to individual microcredit borrowers and groups;

observing meetings where loans are given out; examining the pass books of borrowers,

looking at the account books of the lending organizations, riding around with

the staff of microcredit orgs; I’ve followed borrowers into their huts in the

slums and in villages and asked to see the things they say they’ve bought with

their money, I’ve talked to folks in the same marketplaces who are not microcredit

bnorrowers to try to see how their activities differ…

And I’ve been doing this for 23 years on three continents in countless projects,

in India, in the Phiippines, in Pakistan, in Kyrgystan, China, central America,

in Malawi, Kenya, South Africa, Guinea, Senegal, Morocco, Togo, Mauritania,

Egypt, etc etc. . Usually my role has been as an evaluator of microcredit projects.

And before this experience I spent 20 more years in development assistance,

beginning with a stint in the Peace Corps in 1964-66. In between I got a PhD

in cultural anthropology at the U of Chicago.

I’ve also followed the literature on microcredit, from its beginnings in the

mid 70s, as well as doing historical research on the role of mass credit in

economic history.

So how do I come to my conclusions? I began to notice and think about problems

in microcredit after seeing the same things over and over again. Especially

the fact that most microcredit clients operate in the "informal sector"

and tend to do things that anyone else can do. As I kept seeing these same activities

in countless projects, it began to be clear that these people are in a default

mode, with little or no potential to move beyond where they are. They are buying

and selling cheap goods as a means of survival – there is little else available

for them because in the poorest areas, they are living in economic environments

that do not provide them with opportunities, that do not offer them the protections

and encouragements of a system of institutions that functions even remotely

well (e.g. property rights, legal and judicial functions, etc.), not to mention

providing them with the basic infrastructure of an articulated economy – roads,

electricity, running water….

Moreover, in many of these environments the marginal boost they get from a

microloan is not enough to really differentiate them from folks on the same

roadside who are not taking microcoans. They’d be pretty much where they are

with or without microcredit.

There are of course, always individuals who do move forward and actually grow

a business – these are the faces on the covers of the annual reports of microcredit

institutions and on their websites. But these exceptions are real entrepreneurs

and they almost surely would have made it anyhow (see my

Cato paper, and people like economic historian Richard Posner of U of Chicago

Law school). But no one is asking the "counterfactual" question –

what would the lives of these people have been like without microcredit?

You ask specifically about the Emran, Morshed and Stiglitz paper. It is true

that the labor market for women is non existant in many of the poorest countries.

But microcredit is not providing a labor market for them. It is enabling them

to undertake what should more accurately be called "income generating activities".

We are wrong to glorify that type of activity as the equivalent of a "labor

market" or of "entering the workforce." (Women in poor countries

are already in the workforce, big time. The problem is that their labor is unpaid.)

But the little money they make doing income generating activity does not move

them out of poverty and is a far cry from a real entry into the workforce, which

would mean real wage employement, which is, by the way, what most people in

the world want. That is not what comes out of microcredit. Nor are their income

gerating activities the equivalent of real businesses. Which is also why I don’t

agree that these activities make such women "ecnonomically productive."

What these activities do, plain and simply is "generate income" but

that income is, again, marginal stuff.

Well, let’s leave it here for now. I can really go on for days on this and

cite examples, studies, and so on. I would call your attention to my new book:

"What’s

Wrong with Microfinance?" co-edited by me and Malcolm Harper, with

contributions by some of the world’s leading practitioners and scholars of microfinance.

There is a lot wrong with microfinance, and especially with microcredit. It’s

time for enthusiasts to examine assumptions and challenge the PR. Can scores

of presidents, prime ministers, monarchs be wrong? Yes. Can the Nobel committee

be wrong? Yes. Can celebrities and the media be wrong? Yes!!! Can Stiglitz and

development gurus like Jeff Sachs be off the mark? Yes.