Microfinance has been touted as a ‘bottom up solution’ to poverty. The Nobel Peace Prize 2006 was awarded jointly to Muhammad Yunus and Grameen Bank “for their efforts to create economic and social development from below.”  Give people access to credit, the story went, and they will be able to invest in businesses of their own.  The Acumen Fund promises “Dignity not Dependence. Choice not charity.”

But in the latest episode of Development Drums, David Roodman explains that rigorous evaluations of micro-credit suggest that, on average, it has no effect on poverty. (The results are more positive for other financial services.)

Why then, David asks, does he witnesss women queueing up enthusiastically for their loans?  Should he explain to them that, according to the results of complex evaluations, microfinance is doing them no good? Are they mistaken about what is in their interest?

David’s answer is that while microcredit has, on average, no effect on poverty, it can produce significant benefits for the poorest people, by enabling them to manage volatile and uncertain incomes.  We should think of microcredit not as a catalyst for economic growth, but as a utility, providing a key service to poor people. Subsidizing the provision of this service is a relatively low-cost way to help people to increase their welfare.

Int his book, Due Diligence: An impertinent enquiry into microfinance, David explodes the lavish claims made by the microfinance industry about the difference it makes, while accepting that financial services have an important role to play in supporting poor people.

This is, I think, a microcosm of a bigger story about aid as a whole.  There is plenty of evidence that aid improves people’s lives, for example by providing food, water, education and health.   It is much harder to show that aid catalyses economic, social and political transformation. (This is partly because, even if aid did have such effects, they would be very difficult to demonstrate statistically.)

As in the case of microfinance, the aid industry tends to over-promise and under-deliver. Everyone wants individuals and countries to be able to stand on their own two feet, and not depend on hand-outs from others.  But it does not follow that microfinance can bring this about for individuals, nor that aid can bring it about for countries.  Setting this as the standard for success undermines the case for both, by neglecting the very important and demonstrable success of both against more realistic objectives, of helping people to live better lives while that process of development is taking place.

You can listen to Development Drums here on the website, or you can subscribe to it free in iTunes.

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3 Responses to Microfinance as an allegory for aid

  • I tend to agree with your article that the aid industry over promise and under deliver. This is not a new revelation. My question is – why does country after country tolerate this charade? Why is it in their interest to turn a blind eye to something as obvious as this?

  • When it comes to the development aid industry, clever comms/promotions teams and the lack of media interest in penetrating analysis highlight the very true fact that aid makes a difference in the lives of individuals.  Whether or not it leads to the promised land of development is another matter, so thanks for highlighting this interesting analysis of micro-finance.  For me, the more interesting question is whether or not development aid, while improving people’s lives, doesn’t somehow work against economic, social and political transformation.  In other words, can we imagine that development is countered by the way development projects, even and perhaps especially the ones built upon so-called “community participation”, build dependence on the outsider?

  • Aid has a purpose but investment has a plan. All people share a certain potential but it can be hindered by an outsiders view of what they are able to accomplish. Aid carries many assumptions of what people want and doesn’t always address their needs. Yes, I agree that when an economy is not effective and people are starving that they should be fed and clothed. I disagree however, with the assumption aid brings that the people must remain in that condition and rely solely on a handout. People have physical capabilities to provide for themselves when the opportunity of economic freedom is given but its not always the international community who is responsible for what is deemed economic freedom in all countries.

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