February 25, 2024

Economix: A Fresh Look at Fighting Global Poverty

Book Chat

Dean Karlan, a Yale economist, and Jacob Appel, a former field researcher in West Africa, are the authors of a new book about fighting global poverty, “More Than Good Intentions.” Richard Thaler has described the book on the Nudge blog, and Tyler Cowen has called Mr. Karlan “one of my favorite young economists.”


I quoted Mr. Karlan in a New York Times Magazine article about economics experiments, and I explained his general approach to economics in a column about some of his colleagues.

My conversation with Mr. Karlan and Mr. Appel follows.

Q. You write that microcredit — small loans to poor people — “has generated more enthusiasm and support than perhaps any other development tool in history.” You agree that microcredit has great potential, but you also suggest that it’s been oversold. What’s known at this point about how it does, and does not, improve people’s lives?

Mr. Karlan: Rigorous evidence about the impacts of microcredit on borrowers’ lives is just beginning to roll in, and the picture for donors is mixed. The three major randomized evaluations of microcredit conducted thus far have not found it to be a universal remedy for poverty, as some advocates claim — but we have observed positive some impacts, at least for some people.

The first major revelation is that, in practice, microcredit often looks and feels very different from the standard story proponents tell: a poor, enterprising woman takes a loan, grows a tiny business into a small- or medium-sized enterprise, and lifts her family out of poverty.

Some of the most positive impacts found yet, in an evaluation conducted in South Africa, actually came from microloans made to employed individuals rather than microentrepreneurs, and at very high interest rates. I have found that most microcredit professionals hate this result, since this version of microcredit bears little resemblance to the traditional version that people are asked to support with donations. But this worker-focused version of microcredit does seem promising.

In this instance, it increased income and reduced poverty. It worked by helping borrowers weather bad times, for example by fixing a broken vehicle needed for work, or by sending money to a sick relative in a rural area instead of leaving work to tend to the relative.

Q. I imagine many people who work in this area believe their own microcredit program is more successful than the ones you and other researchers have evaluated. And they probably have some reasons for believing so. What would you say to them?

Dean Karlan, co-author of Michael Marsland Dean Karlan, co-author of “More Than Good Intentions.”

Mr. Karlan: Yes, a common retort we hear from advocates is that we have simply evaluated the wrong microcredit programs. We have two responses to this: first, many important features do appear fairly similar across microlenders, although we certainly agree programs are not entirely uniform. Second — let’s evaluate what you think is the special sauce.

Some studies under way now are doing just that, trying to evaluate programs that incorporate business training and health training, for instance. We will see in due time whether these distinctive program features really translate into impact.

A final point I believe is key: many investors, not donors, are pouring their money into large microcredit institutions. Indeed, many microcredit organizations are making a fair amount of profit. Given the positive, albeit not overwhelming, impacts found, I encourage investors to invest in microcredit. But they should be aware their investments, while helpful, are not about to solve poverty. Their rhetoric, too, needs to be toned down a bit. This is not the “bottom of the pyramid” solution to solve world poverty.

And I encourage donors to seek out either ideas proven to be more effective, or to support alternative models of microlending accompanied by rigorous evaluations so that we can find the approach that is most worthy of donor money.

Q. What are those ideas — the ones that so far have been proven more effective?

Jacob Appel, co-author of Adam Zucker Jacob Appel, co-author of “More Than Good Intentions.”

Mr. Appel: There are a few that stand out. In the area of finance, microsavings, a less-celebrated financial instrument for the poor, is emerging as a powerful tool. Specifically, commitment savings accounts, which allow savers to (voluntarily) restrict access to their deposits until they reach a time or balance goal, have stood up to rigorous testing. For example, in the Philippines we saw savings increase by 80 percent for everyone offered such an account, and we saw women gain more power in the household as a result of getting access to their own commitment savings accounts.

In education, there are two powerful ideas. First, deworming — this one is practically a no-brainer. In communities that suffer from intestinal parasites, providing free deworming medication at schools for about 50 cents per student per year can reduce absence rates by about a quarter (not to mention the health benefits from eradicating the worms!), and also lead to higher income later in life.

Second, remedial education to help struggling students: getting kids into schools is a start, but sometimes student achievement stagnates despite increased attendance.

The caveat here is that, with hundreds of rigorous evaluations going on now around the world, we are still learning. Of course, action needs to be taken; we can’t just sit back and wait for all the research to be completed. Dean’s group, Innovations for Poverty Action, just started a fund that keeps zero overhead or administrative charges and passes on 100 percent of all donations received to projects implementing proven ideas. Another source of good ideas is Givewell, a group that uses research and organizational assessments to make recommendations about which groups can most effectively use donations.

Q. You also write about programs that give money to people in exchange for certain behavior, like enrolling a child in school. Oportunidades, in Mexico, was the pioneer here. They’ve also shown to work in many settings. What about in the United States — have any worked here? Could they?

Mr. Appel: Yes, conditional cash transfer programs like Mexico’s Oportunidades have indeed been tried here in the U.S., with some success. A notable example is a series of education-oriented programs evaluated by Harvard economist Roland Fryer in the past few years. These offered cash incentives to students for achievements at school, like $50 for getting an A on a test, or $2 for reading a book.

The results were mixed. The findings suggest that incentives for behaviors students control immediately and directly (like showing up or paying attention in class) work better than incentives for outcomes that the students influence but do not control directly (like test grades). Happily, the process of modifying and rigorously testing these programs is ongoing.

Article source: http://feeds.nytimes.com/click.phdo?i=24acd5095b7436e40f6bfd448cacb4fe

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