Print
Share
Debating Bateman
December 8, 2011
On January 30, Milford Bateman and I will come together in Washington, DC, for a public debate. Chuck Waterfield of MFTransparency will moderate. The event is sponsored by USAID’s Microenterprise Development office and the Financial Inclusion Forum of DC and will be hosted by Microlinks. It will be webcast live.
The topic of the debate will of course be…well that’s for you to decide. The organizers are gathering questions from the public. You can submit one here. Also, the questions are supposed to be under the heading of “moving financial inclusion beyond microfinance.”
As an econometrician, which I sometimes am, I would say this debate is overidentified. The heading gives it one focus. The pairing of the protagonists gives it another, on the impacts of microfinance. (Presumably we are brought together because we disagree on certain things, and that’s what we seem to disagree on.) Your questions may give it a third focus.
For a potential preview, see this post, including the comments from Milford [update: or see the comments below].
Possibly Related Posts
6 Comments on “Debating Bateman”
Post a Comment
We value frank and constructive exchanges and encourage you to use your real name in your comments.
December 8th, 2011 at 12:43 pm
David
It was with some trepidation that I accepted USAID’s invitation to debate you once more, especially after your (in)famous ‘blank slide’ trick last time in Groningen. But I am going to be in DC anyway at the end of a month-long lecture tour of the USA and Canada talking mainly about microfinance. And anyway I thought it might be fun, especially now that things are changing in the world of microfinance so rapidly and fundamentally, and in the precise direction many of us microfinance skeptics have long predicted.
When I saw your blog posting on the 28th November, I realised that we don’t disagree at all on some key things. You wrote that ‘On current evidence, the best estimate of the average impact of microcredit on poverty is zero (.) Now unless you now attempt to wiggle out of this very important statement somehow, then this is really huge: finally, you have come around to agreeing that the evidence we have shows that microfinance does not work in any meaningful sense of the term.
However, you then go on to spoil things by saying that ‘Microcredit does not appear to be the financial equivalent of cigarettes’. I would argue that it might well be very much like cigarettes, in that for the majority of users it does damage in a variety of ways, an important fact that it not cancelled out by the fact that we can also identify a small group for whom it appears that cigarettes have a neutral or even positive effect.
I would actually prefer to argue that microfinance is like a failed anti-cancer drug in many respects, in that it does indeed benefit a few people, but for the vast majority it has no impact, and for some it has a negative impact (e.g., business failure leading to deeper poverty, overindebtedness, etc). If clinical trials did indeed confirm after some years that a particular anti-cancer drug had an ‘average impact of zero’, then such a drug would be phased out. No doubt about it. Only the manufacturers and their lobbyists would defend its continued use, and we all know why they would do this don’t we. Many so-called ‘wonder drugs’ have indeed been phased out when it become clear they did not work. One simply cannot justify spending vast amounts of public and private money on an intervention that has such little impact, especially when there are all sorts of alternative treatments around.
The very same goes for microfinance: it has had zero impact, as you now finally agree, and there are also obvious program alternatives (CCTs, cash grants, small business lending, etc) plus alternative ‘tried and tested’ delivery mechanisms too (credit unions, cooperatives, etc): but for some strange reason, you still succumb to the microfinance industry pressure to keep ‘zero impact’ microfinance on the table as a development intervention. This is really quite illogical – you agree that there is no evidence of impact, yet you claim it is still important. As someone else said a while back, I think you are now into projecting your ‘belief’ in microfinance, a belief that you admit elsewhere is simply not backed up by any evidence.
I think you are quite wrong to base your decision on the positive impact for a tiny few while ignoring the overall impact. The logic you use here would mean you should surely also get massively into supporting gambling as a way for the poor to get themselves out of poverty, since it is also possible to find and publicize a small number of successes (the jackpot winners) that co-exist with the much higher percentage of people who just broke even and those lost their stake money and became poorer overall (in fact, this is EXACTLY what gambling companies do, but for reasons that are entirely to do with maximizing their own profits and nothing to do with helping their clients out of poverty!).
Of course, you are not at all alone in making such an error of logic. I just read the CGAP paper just out by Jonathan Bauchet, Cristobal Marshall, Laura Starita, Jeanette Thomas, and Anna Yalouris. They fall into the exact same logical trap as yourself, talking about the benefits to a few entrepreneurs while failing to qualify that this has absolutely no meaning whatsoever without any corresponding assessment of what happened to the much larger number of break-evens and losers. It is the NET impact of poverty on the community that is critical, not the partial impact on some groups (the successes). So this CGAP paper’s discussion and results are pretty meaningless. Of course, it goes without saying that many microfinance supporters in the field repeat the same logical error when flagging up the occasional success (jackpot winner) without any form of qualification – for the latest quite random example, check this out:
http://vibeghana.com/2011/11/2.....f-poverty/
So already we have several good debating points. See you in DC on the 30th!
Milford
December 8th, 2011 at 1:29 pm
Hi Milford,
Debating points indeed!
I have no idea idea what you mean by a blank slide trick. (I do sometimes make the first slide in a PowerPoint file black, so I can control when the first needed image appears. See page 62 of Andy Goodman’s When Bad Presentations Happen to Good Causes.) As I wrote before, I prepared my talk by reflecting on the moment and writing what I felt moved to write. I never pretended to anyone that I would do otherwise.
My statement that the best estimate of the impact on poverty (by which I mean poverty of the clients) is zero is nothing new. In May 2009, in blogging the first randomized study of the impact of microcredit, I wrote that “in my view it was for decades essentially correct to say that we have zero solid studies of whether microfinance makes clients better off on average.” In summarizing that study and the subsequent Karlan and Zinman one I made clear that neither found impacts on indicators of poverty. At the end of my 2006 report, Microfinance as Business, you’ll find a fairly skeptical summary of the evidence to that point, except that there I felt I had to concede the positive results in Pitt and Khandker—which I later, after scrutiny, would strongly attack.
I don’t think there’s any question that the evidence shows that the average impact of cigarettes on health and family budgets is negative. The same cannot be said of microfinance. So the two are different.
If you approach microcredit impact studies with the prior that credit is a dangerous thing, which is an appropriately conservative prior, then what I think should be striking about the randomized studies is that they haven’t found it making people worse off on average. Common sense says that it has different impacts on different people. On the limited evidence we have so far, the spectrum of impacts centers around zero. To assert otherwise is to take leave of the high-quality evidence that we have.
Milford, you have frequently cited the IDB report, The Age of Productivity as arguing that the strategy of supporting microenterprise in Latin America has not only failed but been harmful, by diverting support from larger firms, which, the report argues, are the engine of productivity growth. Now, if Latin America had more large firms, what would they sell? Breakfast cereal? Cars? Internet service? Microchips? Would they do retail on a Walmart scale? (And would you support that as local economic development?) Would these large firms reduce poverty among clients through the goods and services provided? Probably not much. Yet, the idea that their rise would represent real economic development, that it would create more and better-paying jobs, seems reasonable to me. Does not microfinance fit this mold? It provides a service that probably doesn’t have much effect on poverty, based on the evidence we have, yet the industry has fostered the rise of large employers. I point out in my book that the average microcredit loan comes from an institution with 9,000 employees.
Ergo one must distinguish between direct impact on clients and contribution to development.
December 8th, 2011 at 2:40 pm
David
Your questions about the IDB study are very interesting. We both know that the Manager of the IDB Research Department, Eduardo Lora, thinks (or thought!) otherwise, but I find this excellent book – The Age of Productivity – to be one of the most savage indictments of the microfinance model to have emerged this last few years. I’m pretty sure that’s not what the authors or the IDB meant it to be directly, and the IDB could anyway certainly not have entertained such a direct attack given its current and planned support for the microfinance model. But in almost everything the book concludes, it serves to cut the legs from under the microfinance model. On almost every page and from different angles, it repeatedly castigates the Latin American economies for putting so much of their scarce financial resources into promoting so many unproductive informal microenterprises and so much self-employment, which it centrally says is the proximate cause as to why the continent has remained (until recently – the new leftist governments have managed to make important progress in finally reducing poverty) in deep poverty and underdevelopment. Yet, as we all know, such outcomes are actually the programmed outcomes of the microfinance model! The urgent need to re-base Latin American economies on formal sector SMEs comes through time and again (I do not find, as you appear to do, so much of a recommendation to support large firms). The need not to waste Latin America’s financial resources on low productivity informal microenterprises and self-employment is the single most important message to come out of the book for me. And even though promoting formal sector SMEs is not easy and certainly not the perfect solution, as the book also makes clear in Chapper 9, it is nevertheless clearly seen as the preferable option compared to the microfinance option.
The book is especially good on Mexico’s development dilemma, referring to its growing informalisation and primitivisation across many chapters thanks to the promotion of informal microenterprises and self-employment. Indeed, that this adverse informalisation via microenterprises and self-employment trajectory is very clearly undermining and destroying the average local economy has been long recognised by one of the main overall consultants to the IDB book, Santiago Levy. Levy writes elsewhere (2007) that the problem in Mexico is that ‘There are more resources to subsidize informal employment than formal employment’ and so ‘Mexico is probably saving less and investing in less efficient projects’. Mexico’s biggest development problem today, Levy says, has become one of ‘Over-employment and over-investment in small informal firms that under-exploit advantages of size, (and) invest little in technology adoption and worker training’. I think this is a pretty clear and strong recommendation not to support microfinance and programmed microfinance outcomes, and to support larger formal firms, which will surely very much include formal sector SMEs, so I rest my case.
Milford
December 8th, 2011 at 3:58 pm
Milford,
The chapter of the Age of Productivity that you cite, chapter 9, is called “Big Questions about Small Firms.” I think you mischaracterize it in two ways.
First, it is hardly emphatic in its conclusions (c.f. your “nevertheless clearly seen”), except in pointing out that we have almost no information about the impacts of programs that are meant to raise productivity in firms of various sizes. That said, I agree that the thrust is skepticism about the value of focusing on small firms (see page 10 of the executive summary).
Which brings me to the second mischaracterization. The main conceptual line the book draws is not between microenterprises (which are hardly mentioned) and everything else but between small and medium-sized enterprises (SMEs) and larger companies. The “big questions” in the chapter’s title are about SMEs. So the book seems skeptical of support for them, whereas you cast it as the opposite. From the executive summary:
At any rate, I would think that a lot of microfinance institutions would be classed in the SME size range you like—at least until they graduate to being large firms, presumably becoming more productive in exactly the sort of process this book wants to see more of. The Latin American microfinance sector therefore seems like a reasonable success in the paradigm of this book—or at least not the catastrophic failure you say it is.
December 9th, 2011 at 6:51 am
David
I agree with you that the IDB book is vague on the definition of the firms it finds to be ‘bad’ (low productivity) and those it finds to be ‘good’ (higher productivity). Perhaps, as I said, this was a deliberate strategy, so as not to avoid upsetting the still powerful microfinance industry operating within the IDB and outside?
But I think any sensible person carefully reading the book can only come to the conclusion that when the IDB constantly refers to informality and small-scale and self-employment and firms being ‘too-small’, it is mainly, if not overwhelmingly, referring to microenterprises, and not so much to SMEs (which are typically more likely to be formal, operate at or above minimum efficient scale, involve owner(s) and employees and are by definition not as small as microenterprises). And when the IDB sums up its argument as follows – “Unlike other regions of the world, the overwhelming presence of small companies and self-employed workers (in Latin America) is a sign of failure, not of success” – then surely they must have in mind informal microenterprises far more than formal SMEs? In fact, I think the IDB are referring to the ‘missing middle’ phenomenon here – the relative lack of innovative formal SMEs compared to millions of informal survivalist microenterprises and a handful of large companies – which is a growing problem that affects not just Latin America but all other continents (for some of the best work on this issue, see work by Aneel Karnani)
http://www.amazon.com/Fighting.....0230105874
Also, yes, the IDB book does cast past support policies for SMEs in a harsh light, but that is not the same as saying that government’s in Latin America should not be supporting SMEs per se. The target – supporting innovative SMEs – is right, but the way of getting to the target (the policies, programs, instruments, etc) has possibly been wrong so far. Note too that the discussion at the end of Productive Development Policies (PDPs) refers many times to the need to work across ‘specific sectors and clusters’, which I take to mean working with SMEs, which are typically found in clusters, compared to large firms for which the cluster concept is meaningless if, as is most common, you just have a couple of them (two firms does not a cluster make…). So I take the book as making an important case for PDPs as they might – as typically everywhere else in the world – be applied to support the growth and development of the formal SME sector in Latin America.
I was not clear about your final comment referring to MFIs being in the SME range. Are you claiming that we should judge MFIs as SMEs and so in terms of their growth, profits, etc, and not the growth and development of the local community? If so, then this is a completely new twist in the effort to portray microfinance in a positive light! Many MFIs in Latin America as SMEs are very efficient on these financial criteria, no doubt about it (only one word is needed here – ‘Compartamos’), but these commercial MFIs have ended up destroying the local economy in the process of becoming so financially/operationally efficient. Mexico is one obvious case with its rapidly growing ‘changarrisation’ problem. My own work in Colombia with colleagues in Medellin highlights similar problems there too, and the brave efforts of the city and regional government to correct for the fatal flaws in commercial microfinance as much as possible.
But probably the best case is Bolivia, where since the early 1990s its MFIs have been seen as world-beaters in terms of their operational/commercial criteria, on the one hand, but on the other hand the MFIs have combined over the last twenty or so years to very successfully destroy the local economic structure of many communities in that country. I understand from my sources that the Morales government is now waking up to the fact that its economic and agricultural structures have been so thoroughly informalised and primitivised thanks to 30 years of commercialised microfinance that, if they don’t take more radical measures soon, their country will be permanently condemned to a low productivity economy, and so also endemic poverty, inequality and backwardness – in fact, just as the IDB concludes is indeed the case!
Finally, when I made a brief comment on what I thought was a really quite awful CGAP paper released last week, I was unaware that Phil Mader was just about to post a much longer critique of this same paper on his increasingly go-to ‘governance-across-borders’ website. Great minds and all that……Have a look at Phil’s posting – its brilliant!
http://governancexborders.com/tag/bauchet/
Milford
December 15th, 2011 at 10:55 am
I can no longer read these things without Inigo Montoya’s voice echoing in my head.