February 10, 2011
Guest author Kathleen Odell is assistant professor of economics at Dominican University’s Brennan School of Business.
Full disclosure: Last spring, I authored the Grameen Foundation report, Measuring the Impact of Microfinance: Taking Another Look, which was released in June 2010. I was asked by Alex Counts and Todd Bernhardt of Grameen Foundation to comment on Tom Heinemann’s recent documentary, “Caught in Micro Debt,” based on my understanding of the existing impact-assessment literature.
I have just read with great interest the translated transcript of the Danish documentary “Caught in Micro Debt,” which aired on Norwegian television in November 2010. (I understand that there is an English-language version that has very recently become available, but I have not had the chance to watch it.) The documentary paints an unfavorable picture of the microfinance industry, making a number of criticisms. Reading the transcript, I find this film to be deeply biased and misleading on a number of important points.
I don’t have much to add to the discussion about the transfer of Norwegian aid money from Grameen Bank to Grameen Kaylan, and this has been settled elsewhere. Similarly, the question of Grameen Bank charging usurious interest rates has been commented on at length, by David Roodman (his posts can be found here and here), by Alex Counts, and in the definitive study of the bank’s rates by MicroFinance Transparency’s Chuck Waterfield.
I’ll focus here on a claim that the film makes in its introduction: “Tonight we ask if micro loans actually are helping the poor.” Now, here is a subject on which I feel fairly well-informed. For Taking Another Look – which was a follow-up to Nathaniel Goldberg’s 2005 report, Measuring the Impact of Microfinance – I read and summarized much of the recent literature estimating the impacts of various forms of microfinance on the lives of microfinance clients. Here’s what I learned over the course of that project.
If we combine the findings of the best available research, there is modest evidence that microfinance, including microloans, has positive effects on microbusinesses. As my conclusion states, “Various studies showed increases in business ownership, investment, and profits.” With respect to microsavings (admittedly not the subject of the documentary, but surely still relevant), a 2009 study found not only positive business effects, but also positive effects on food expenditures. (Full references are included in Taking Another Look). The microfinance community awaits the release of additional studies of impact, but what we know so far is this: Though some claims of microfinance’s effects have been overly enthusiastic, the academic research, where we trust it, is either inconclusive or points to moderately positive effects. Again from my conclusion: “Based on the studies in this survey, the overall effect on the incomes and poverty rates of microfinance clients is less clear, as are the effects of microfinance on measures of social well-being, such as education, health, and women’s empowerment.”
There is an important discussion to be had here about research methodologies and the nature of program evaluation. However, the point is that if you want to prove that microfinance isn’t helping the poor, the existing impact-assessment literature won’t help you.
So, how, then did "Caught in Micro Debt" take on the question of whether micro loans “actually are helping the poor?” It attempts to do so using anecdotal evidence. The transcript presents numerous stories of borrowers who had been negatively affected by microcredit. Day laborers in Dhaka working to pay off loans. Razia, who had to sell her family home to make her payments. These are certainly not stories of successful microentrepreneurs climbing out of poverty, but neither are they evidence that micro loans don’t help the poor.
One of the criticisms of microfinance rhetoric is the reliance in public discourse on individual success stories. One, or a dozen, stories of successful entrepreneurship do not prove that microfinance is eliminating poverty. But neither does one, or a dozen, stories of over-indebtedness prove that microfinance isn’t working. The way to address the question of whether microfinance is helping the poor is to make careful studies of this question, and to conscientiously interpret the results of these studies.
I deeply value qualitative research, and I believe that individual stories have an important role in our broader understanding not only of microfinance but of economic development tools of all kinds. It is essential to consider the effects of microfinance, both positive and negative, on individual borrowers. But a documentary stuffed full of negative stories can be interpreted as nothing more than evidence that some borrowers run into trouble. It cannot contribute to the larger question of whether microfinance helps the poor on average, any more than an equivalent collection of stories of happy and successful borrowers can. (See Section 4 of Taking Another Look for a more thorough discussion of the limitations of non-experimental research design.)
While writing Taking Another Look, I was struck by the zeal with which the popular press was reporting on the release of a number of randomized studies of microfinance impact. For example, a story in The Boston Globe ran under the headline, “Billions of dollars and a Nobel Prize later, it looks like ‘microlending’ doesn’t actually do much to fight poverty.” This headline certainly oversimplified, and thus distorted, the results of the research. Similarly, Heinemann’s documentary seems to misdirect its viewers, suggesting that it is answering a question – do microloans help the poor? – on which it in fact makes no relevant comment at all.