Another heartwarming microcredit story

This time, from Nick KristofThis is a good opportunity for me to rehash some old arguments! In this article, Kristof places his faith with village savings and loans associations (VSLAs), around multiple countries in Africa. 

If you want to understand some of the best new ideas to chip away at global poverty, an excellent place to start is the Nasoni family hut…

The author is already convinced this is one of ‘best new ideas’ for poverty alleviation.  In doing so, he ignores  the currently available evidence from rigorous impact evaluations of microcredit that are yet to find significant impact on poverty. I understand that the MFI model of microcredit is quite different from the VSLA model, now popular in many African countries (some of which are currently being evaluated). Experience does suggest though that VSLAs are more of a social safety net (rather than economic, and yes, the two are linked) than a pathway out of poverty through profitable economic activity. VSLAs are of course immensely important for the savings habit they cultivate among participants. Encouraging savings is important and quite difficult

…Alfred, 45, told me that even as his children were starving, he spent an average of $2 a week on local moonshine and 50 cents on cigarettes. He added that he also spent $2 or more a week buying sex from local girls…The suffering associated with poverty is sometimes caused not only by low incomes but also by self-destructive pathologies…

This is a well documented phenomenon and numerous studies have focused on temptation goods and commitment devices. It is also true that we all suffer from this in varying levels. Research has also shown that the critical difference in this regard this that the price that the poor have to pay for their temptations is far higher than the rich. Add to this the fact that they receive little benefit from the government and are almost completely (and unfairly) on their own, facing the consequences of their decisions.

…With a loan of $2, Biti Rose started making and selling a local version of doughnuts, which she initially sold for 2 cents each. “People really liked my doughnuts,” she noted, and soon she was making several dollars a day in profit… 

I am deeply sceptical of this claim. A leading Indian microfinance practitioner has often made the point that a whole bunch of women selling bananas is not going to push them out of poverty, thereby explaining the limitation of small loans – neither will doughnuts. Sure, a few are bound to succeed, but we need more than chance anecdotes to see systemic impact. Another major limitation is that microcredit is built on the failure of the formal financial infrastructure and in many ways, keeps it from being fixed. And so yes, just heartwarming stories are not going to help people in poverty, but will only serve to perpetuate the myth of the miracle of microcredit. 

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2 thoughts on “Another heartwarming microcredit story

  1. I don't disagree that microcredit is not the answer in every scenario. But what's the alternative being offered here? Shouldn't we at least be encouraged that some are moving past handouts and dependency?

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  2. There are numerous alternative interventions that have been proven to be cost-effective and have an impact on the well-being of communities – such as clean water, small innovations in agriculture, bednets, deworming pills for children etc. Most of these interventions typically follow the handout/subsidy model, but so does microfinance to a large extent. If one traces back a few years, we will see staggering amounts of subsidy that has gone to microfinance, all from donors who believe this it to be a silver bullet.
    But in fact, I dont think doing away with subsidies is the solution. As discussed in my post, all communities in a democratic state deserve a certain amount of public-money funded infrastructure – roads, hospitals, markets, schools, clean water etc. There is nothing wrong in propping up communities who are denied these basic services through a subsidy/handout model of development interventions.

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