1. Evaluating the Developmental Impact of Microfinance: How to always produce a positive evaluation by deliberately ignoring the downsides Milford Bateman University of Juraj Dobrila Pula, Croatia 3ie-LIDC Symposium: Does microfinance lift people out of poverty? Wednesday 29th June 2011 17:30 to 19:00, John Snow Lecture Theatre, LSHTM, Keppel Street, London

2. Microfinance - the early years Mainly hype and spin, almost a form of faith healing…. Yunus argues poverty will be eradicated in a generation, to see poverty we have to go to the poverty museum, etc…. Donors simply love Yunuss self-help message, so his cause is up and running regardless of the lack of evidence of impact Elsewhere De Soto argues that expansion of informal microenterprises will resolve poverty in Latin America – MFIs and their supporters start to produce their own impact evaluations, all of which turn out to be very positive indeed!

3. 3 critical missing downside factors Looking at impact evaluation exercises it is remarkable that 3 major downside issues have been systematically ignored since the 1970s: –Displacement, jobs and income lost in non-client microenterprises –Failure/exit, quick collapse of clients –Systemic transformation - program impact is simply NOT the same as community/national impact Quick aside - how to explain for this serious omission? I think 3 factors…. –Free market ideology, neoliberals desire to show that self-help and individual entrepreneurship can work for the poor, so no need for state intervention, welfare programs, wealth redistribution, trade unions, etc –MFIs want to show they work in order to get more cash to survive and to grow –Individuals in MFIs want to get rich so deliberately choose to inflate impact in order to get the initial capital, then ongoing funding and later to shift attention away from their supreme enrichment activities, such as moves towards an IPO….

4. 1. Displacement Displacement is employment and income displaced in non- clients in the same poor community, if high can mean no NET job or income gains, or even negative impacts Fallacy of composition – if you can help one basket maker expand, so why not ask everyone in community to make baskets to exit poverty? Assume unlimited demand!! Very high levels of displacement found in UK in the 1980s in its quasi-microfinance program Enterprise Allowance Scheme (EAS), contributing to its demise after only ten years Yet still no-one wanted to factor in displacement anywhere else because it was a major downside factor….why spoil a good concept with awkward facts!

5. 1. Displacement So until very recently all impact evaluations were client-based, not community-based, so as to avoid having to consider displacement Led to Wal-Mart-like fake grand claims to local employment generation……local displacement simply ignored! Also impact evaluations were artificially made to seem even better - control group lost business/trade to the new entrants, so got poorer, so that whatever the new microfinance-assisted entrants earned looked even BETTER compared to what the control group earned (which was now less than before)…. No attempt to establish any local link or causation here!!!

6. 1. Displacement Many have raised the issue: –Jan Breman (2003) and Mike Davis (2006) have long pointed out that displacement is a critical development barrier and it simply redistributes and subdivides the total volume of local business between new and incumbents –Bateman and Sinkovic (2011) found very high displacement in southern Croatia, saw no net gains –Bateman, Duran Ortiź and Sinkovic (2011) found very high displacement in poorest parts of Medellin in Colombia, no net gains –Inclusive Cities Project finds high displacement virtually everywhere it works in developing countries –Even arch-neoliberal Lawrence Summers understands the problem here, noting that, A sick economy works very differently from a normal one. (.) When demand is constraining an economy, there is little to be gained from increasing potential supply (FT, 13/6/2011) Yet still almost no impact evaluation or mainstream microfinance researchers willingly look into the issue of displacement/negative spill- overs….why?

7. 2. Client failure/exit All businesses experience failure, but poverty-push informal microenterprises fail far more than others (Storey, 1994) For example, studies by World Bank in Bosnia and Abraham George in India show very high level of failure - 50% of new microenterprises fail in first year in Bosnia, in India only 2% are still in business 3 years later The problem here is that failure contains the potential to plunge the poor into deeper and irretrievable poverty The original microloan is repaid by drawing down other financial, economic, physical, social and reputational assets, making an individual poorer. High repayment rate does not mean poverty reduction….. Also, many take out MORE microloans in order to repay an earlier microloan that cannot be repaid when the business it established failed – this is a problem in Andhra Pradesh today and in Bangladesh too So failure/exit may mean a descent into much deeper poverty, so how can we justify avoiding to look further into it?

8. 2. Client failure/exit Very common until recently for impact evaluations to quite fraudulently choose only successful clients to evaluate impact – failures/exits simply ignored, leads to survivor bias OK, some say it is difficult and expensive to find those who failed, and anyway socially awkward for researchers to hear their tragic stories But this is like Caesars Palace casino in Vegas choosing mainly jackpot winners to interview when determining if gambling is a good poverty reduction strategy Latest bad example – Freedom from Hunger Human Faces of Microfinance Impact – chose 167 long-standing clients to interview, no exits or drop-outs were considered…..so why are we surprised when the conclusion arrived at was that microfinance can have an important impact on poverty….

9. 2. Client failure/exit Some impact evaluations simply extol the immediate benefits of new microenterprise entry without thinking of the high probability of future failure and impact.. New entry now is always classified as a good thing (Banerjee, Duflo, Glennerster and Kinnan, 2009) without any mention of the fact that most are marginal and so will inevitably fail – new entry is not an impact itself, it is simply a possible, but certainly NOT inevitably effective, means to an end (poverty reduction) This trick is sometimes called a 10 th floor evaluation – will someone survive a fall from 20 stories? Ask them on the 10 th floor as they wizz past – they mutter so far, so good so you conclude that an individual can indeed survive such a fall!

10. 3. Systemic transformation Program impact is not the same as systemic/community impact Needs theoretical framework to show how program impacts on initial conditions associated with sustainable development La Porta and Schliefer (2008) show it is largely a myth that informal microenterprises constitute a seedbed for future SMEs….most formal SMEs started formally and fairly big too Dumpster diving in the USA can be supported and made better for the urban poor, but not many would claim it resolves poverty….yet this link is precisely what is claimed in microfinance! Lets be realistic - local industrial policy shows need for growth- oriented, innovative, non-local demand-focused enterprises with scaling-up technology potential

11. 3. Systemic Transformation Chang (2010) points out that Africa has a super- abundance of entrepreneurs compared to developed economies Yet so many donors today are chasing yet MORE of an increase in the numbers as if this will eventually succeed Key problem in Africa is instead that this largesse is not embedded within an institutional structure that can facilitate transformational outcomes Chang argues that constructing efficient state/collective institutional capability is the most important outcome we want from enterprise development programs…not simply more microenterprises….

12. 3. Systemic Transformation But how to evaluate whether or not the growing population of microenterprises possesses systemic transformation capability? Perhaps look at capacity to link? – clustering, networking, supply chains, etc…… Perhaps look at non-local market opportunities obtained? Perhaps look at productivity growth possibilities? IDB Age of Productivity (2010) proposes Productive Development Policies to support such enterprises

13. Conclusion It is accepted that microfinance impact evaluations have in the past been extremely dodgy, if not outright fraudulent exercises Important downside factors routinely omitted in order to beef up the impression of positive impact, thereby to keep the donor/commercial funds flowing and senior MFI staff private enrichment plans on course… Urgent need now to centrally incorporate these downside factors into impact evaluations in future if we want valid impact results Almost all of the voguish new RCTs have not factored in these downsides so, contrary to growing opinion, are not much good Danger exists that we might now show that microfinance has a very negative impact – but let us not be afraid of the truth!

14. Thanks for listening! You can contact me at: milfordbateman@yahoo.com