Alex Counts on Karlan and Appel’s “More Than Good Intentions”

Dean Karlan and Jacob Appel’s book More Than Good Intentions: Improving the Ways the World’s Poor Borrow, Save, Farm, Learn and Stay Healthy is a practical and important contribution to the popular literature about poverty alleviation and in particular, about the need to rigorously test assumptions in terms of what works, what does not, and how flawed but promising approaches can be improved. Despite its shortcomings, most of which relate to its treatment of microfinance, anyone interested in contributing their time, talent, or energy towards addressing one of the world’s most important problems – poverty – should read this book.

Some years ago I was in a weeklong seminar organized by Citigroup Foundation in Singapore that was attended by some 40 academics, practitioners and business leaders involved in financial services for the poor. From a previous encounter, I had been braced for Karlan to be critical of microfinance. While he did not entirely disappoint in that regard, his comments were more balanced and nuanced than I expected. Especially when the discussion strayed from microfinance, he was the most interesting person in the room. When he spoke, I got on the edge of my chair to make sure I heard him – and I don’t think I was alone. After that seminar, Grameen Foundation began working with Karlan and his colleagues, and we have benefitted from those collaborations.

The book makes some powerful and timely observations about the microfinance field and financial services for the poor generally. (I have written about the half of the book that does not deal with microfinance separately.) When studying why crop insurance was not being taken up by farmers despite proven benefits, researchers unsurprisingly found that in-person visits helped increase adoption rates, but also that there was one-third more uptake when the sales agent was introduced by the local microfinance loan officer.

In other research, it was shown that microfinance solidarity groups that meet weekly (as opposed to monthly) showed, over time, to be “stronger” in the sense that they socialized together and importantly were “more likely to say they’d help one another in a case of emergency” and “had a noticeable effect on clients’ ability to share risk!” As a concluding thought on groups, the authors write, “…frequent group meetings led to repayment, and, in the process, shed light on one of microfinance advocates’ biggest claims – that borrowing groups can engender real social transformation (here in the form of increased risk-sharing) among clients.” Importantly, the findings about groups contradict the current conventional wisdom (which the book reinforces elsewhere) that solidarity group lending is a historical relic that progressive MFIs are wise to abandon.

So what bothered me about the treatment of microfinance? Quite a bit, actually. The work of Kiva, an important and rapidly improving movement-building organization, is mischaracterized early on. Contrary to the book’s contention, for a number of years Kiva’s policy has been that if loans are not repaid by the client featured on their website, the original lender is not repaid. Without evidence, they argue that the reason that MFIs impose so many rules on clients, such as that their loans be used for productive purposes, is that “donors tell them to” and that shifting loan uses “infuriates donors.” As someone who has been raising funds from donors for microfinance for 15 years, and who has in turn effectively been a donor (mostly of technical services and loan guarantees) to MFIs, I have never been asked by a donor to restrict the uses of loans by the clients, nor have I raised this with our partner MFIs even once. In fact, most MFIs today receive little money, and virtually no instructions, from donors to capitalize their loan funds. In reality, rules are put in place by MFIs for reasons of operational efficiency and effectiveness (as David Roodman correctly argues in his book Due Diligence which I have also reviewed), and in many cases those policies have been relaxed to, for example, allow clients more flexibility in using loan proceeds to meet changing business and life-cycle needs (which is confirmed by actual research they cite, including one showing that 58 percent of loan proceeds are used for business investments).

Elsewhere, the authors cite a study showing that loans enable microentrpreneurs who previously scrambled to eke out a living from multiple under-capitalized businesses to consolidate their mini-ventures into a smaller number of enterprises that are more profitable. They seem to think this is a revelation (writing that the results were “simple, but also unexpected”). For those of us working in the field, it is common sense and in fact a fairly typical example of how microfinance can work. The authors’ sarcasm ratchets up by challenging the microfinance movement to promote stories of clients prospering by “closing down businesses” since they would at least “have evidence to back them up.”
The authors seem intent on creating a microfinance straw man that they can cut to size by their research. Two examples:

  • “The great promise of microcredit is that it can be plunked down almost anywhere and be expected to pull entire communities up out of poverty.”
  •  “Everyone is singing [microfinance’s] praises … and some see it as the storied ‘golden bullet’—the singular big idea that will solve poverty once and for all.”

It would be hard to back up these claims, and it is easy to demolish them. The fact is, almost no one associated with microfinance makes pronouncements this bold. Certainly microfinance advocates aggressively market their work, as do people in virtually every field. But accusing the movement of regularly marketing itself as a “golden bullet” that can single-handedly “pull entire communities out of poverty” is not only false but divisive, as it pits other social innovations tackling poverty against microfinance (as they would presumably be unnecessary if microfinance is seen as being able to defeat poverty on its own).

Furthermore, the book becomes a bit patronizing when it recommends that microfinance advocates need to come to terms with the fact that borrowers have varying levels of entrepreneurial ability and that they should attempt to tweak and diversity their product offerings – ideas that even relatively unsophisticated practitioners would readily acknowledge and have likely been acting on for years. One such quote: “…the fact that the poor are not all innately top-flight entrepreneurs should not come as a big surprise—but, judging from Muhammad Yunus’ words, it’s something many microcredit advocates need to hear.”

Rather than present readers with a couple of Yunus quotes taken out of context, a better guide might be Yunus’ actions, such as starting 55 companies working alongside microfinance to complement Grameen Bank’s financially oriented services in myriad ways – something that would not be necessary if microfinance was, or was perceived by Yunus to be, a “golden bullet.”

Perhaps the most important element missing from the book’s analysis is what I would call the “political economy” of scaling social innovation. The authors cite several ideas that their research has proven to work on a small scale: deworming, microsavings, video monitoring of teachers to ensure accountability, and more. Microcredit, especially based on solidarity groups, is found comparatively lacking – particularly when measured up against the supposed miraculous claims of its effectiveness. The book’s implicit theory of change is simplistic and unrealistic: if programs are empirically shown to be cost-effective, they will more or less automatically attract donor dollars and other needed support (such as enabling legislation and the acquiescence of vested interests that may stand to lose while the poor gain).

The history of social innovation clearly argues otherwise. This does not mean that research should be abandoned. Rather, it means that it is important to acknowledge that some social innovations – such as microcredit – are inherently more scalable than others, which is to say, easier to promote the expansion of in the socio-political contexts that they operate in. Others are simply lacking aggressive promoters – their own Sam Daley-Harris’s, if you will.  At times, making operational compromises that may (if only temporarily) reduce the cost-benefit calculus can be essential to a scaling process that is so important for achieving widespread impact – compromises that the authors seemingly would only view through a static, one-dimensional analysis. The laser focus on efficient loan distribution systems that propelled the rapid scale-up of microfinance is one such example.

This worldview recalls Judith Tendler’s classic paper from the 1980s, “What Ever Happened to Poverty Alleviation?” Tendler criticized the Ford Foundation’s South Asia staff for overly romanticizing grassroots, bottom-up, participatory projects that were destined not to scale, while not sufficiently valuing those that had scaled, or could. Tendler’s basic thesis is that the Ford Foundation’s unbalanced evaluation framework was working against the larger issue of poverty alleviation. A quarter century later, micro-level cost-benefit calculations have simply replaced participatory development in being overemphasized and not seen in their proper context.

The authors are notably vague when it comes to how many of the social innovations they promote have scaled. On deworming: “… it’s catching on. Efforts by Innovations for Poverty Action and its partner organizations have led to millions of children being dewormed…” How many millions (and what was the role of research rather than the slow expansion of long-standing deworming efforts)?  How does that compare to the need? The authors do not say (though they do cite 20 million as the figure for 2009 but it lacks any context or trend analysis). Chlorine dispensers work “so let’s get people using it” they write. How many are doing so and what are the barriers?  We don’t know.

A positively evaluated model to promote education through conditional cash transfers in Mexico has “sprung up in a half dozen other countries, and now serve tens of millions of families worldwide.” Those are pretty inexact figures, and they lack context. One wonders why most of the countries of the world have not adopted it, and the role of research (if any) in accelerating this modest growth.  Indeed, research into the effectiveness of research itself – and how to make it more effective in the socio-political contexts in which it exists – may be a productive line of inquiry.

Social innovations like those promoted by the authors would likely benefit from having civil society advocates of the kind that microfinance has been blessed with, people who could build political alliances and make occasional compromises in terms of service delivery and communications in order to enroll powerful scaling partners. (One wonders if that were to happen, whether those advocates would see people like Karlan as their allies.) Furthermore, building on the observation that microinsurance uptake was highest when microcredit field agents made an introduction, the concept of leveraging (rather than undermining) microcredit and its massive field force for the purpose of promoting social innovations like deworming is an enticing one, though the authors do not contemplate it.

Overall, this is an important book. At times the writing is graceful and entertaining. While some of the findings are obvious, a few are quite revelatory – and even the obvious ones are not all  being applied by program designers and practitioners as they should be. Hopefully a follow up book that summarizes the latest research can be shorn of hyperbole and reflect a more complete theory of change. Even more than Beyond Good Intentions, such a resource would be a terrific and more holistic guidepost to help ensure better uses of the human and financial resources put aside for the reduction of poverty.

Image Credit: Grameen Foundation
*This post was modified from its original version on September 7, 2012.

Have you read?
Eight New Observations on the Aftermath of the Indian Microfinance Crisis
“The hype is long over” – Microfinance CEOs respond to Washington Post article “Microfinance doesn’t end poverty, despite all the hype.”
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