Does Microcredit work? it depends…

There are a series of papers evaluating impact of microcredit in 6 countries.

Justin Sandefur of CGDEV sums them further:

the new January volume of the American Economic Journal: Applied Economics that Glennerster refers to contains six separate randomized control trials, using various designs and methods, all attempting to measure the impact of microcredit on poverty (broadly defined), and all reporting their results in a more or less comparable format. It’s early days, but I think it’s fair to say this volume marks a major milestone in the evolution of development economics as an experimental science. It is not only the culmination of over a decade of work by dozens of researchers working across six countries and four continents, but one of the first instances where development economics has confronted multiple, high-quality experimental results on a core question in the field.

The results, however, are a tad disappointing for microcredit proponents.

As Abhijeet Banerjee, Dean Karlan, and Jonathan Zinman note in their introduction to the volume, the most consistent finding across the six studies is a “lack of evidence of transformative effects on the average borrower.” None of the six studies found any significant impact on borrowers’ household income. While the Mongolia program raised borrowers’ consumption (economists’ preferred measure of poverty reduction), the Bosnian study found the opposite effect, and the Ethiopia study found a negative impact on a related concept, food security.

At this point, it is clear that any responsible policymaker must support the end of public subsidies for microcredit, social entrepreneurs should redirect their energies to some better cause, and this multi-billion dollar industry must wind down. Rigorous impact evaluation has proven it was all built on a myth.

I’m kidding. In reality, I don’t know of anyone making this argument. But it’s useful to articulate why not. The evidence is fairly damning, after all. 

It is all about it depends. We should be careful n drawing generalised conclusions:

Measured in monetary terms—using comparable purchasing-power parity dollars—the point estimates of the impact on profits ranged from an increase of more than $700 per year in Bosnia to zero in Mongolia. Conversely, impacts on consumption ranged from a $700 per year decline in Bosnia to a $600 increase in Mongolia. If you squint at the figure, you could argue there’s a visible trade-off between using the loans for business investment and profit versus short-term consumption.

With the enormous benefit of hindsight, this heterogeneity is not surprising. After all, the programs and contexts in which they operated differed enormously. Some of the programs lent only to women, others to men as well. Some gave individual loans, some only group loans. And both loan sizes and interest rates were very different in different places,  ranging, for instance, from a 15 percent rate in Morocco to 110 percent in Mexico. The catchall term “microcredit” encompasses virtually infinite permutations of program characteristics.

This means there is never going to be a single answer to the question, “What is the impact of microcredit?” because, inevitably, “it depends.” Lant Pritchett and I wrote a short paper for the recent American Economic Association conference (available here), which discusses this heterogeneity and what it means for evidence-based development policy.  The bottom line is that policymakers should be extremely cautious in extrapolating the results of impact evaluations across contexts.  Notably, the authors in this new AEJ volume focus on nuances and underlying mechanisms, and carefully avoid such extrapolations.

Of course, the ultimate goal is to eventually be able to predict the impact of some new microcredit program in some new context, in the same way “real” scientists can predict the boiling point of water based on the local air pressure and oxygen levels.  We may not be there yet, but these new studies take us six big steps closer to that goal.

I don’t think we can really get to the science bit. Social science is all about uncertainty and different environments. That is the beauty of the subject. We always get into trouble when we try and move closer to the science frontier..


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