My concern is that development theorists prioritise microcredit over mainstream banking. Some excellent resources on this topic are an MIT paper on Banking Reform in India and the website The Next Four Billion

Microfinance has high opportunity cost, deflecting donor attention from engagement with the banking sector. The justification for microfinance is more charitable than developmental, suffering from all the old aid project faults of establishing parallel systems that are inefficient and unsustainable. Sure, microcredit has a place where the state is hostile to development, but if a state wants to develop then it is far better off fixing its banking regulation to enable credit for dynamic firms than promoting microloans. Recipients of the microloans are better off getting a job from a capitalist. As Adam Smith pointed out in his famous parable of the pin factory, micro enterprises lack economies of scale.

Links: MIT Paper: http://econ-www.mit.edu/files/510
Next Four Billion: http://www.nextbillion.net/blog/2007/03/14/the-next-4-billion-market-size-and-business-strategy-at-the-base
Adam Smith Pin Factory: http://en.wikipedia.org/wiki/Business_process#Adam_Smith

The question this raises is the balance between aid focus on the most vulnerable and on making markets work for the poor. I suggest working to correct market failure is a more effective approach. A key question that should be asked more loudly is why firms at the margin of bank lending do not get loans, and what can be done to address this, so these firms can employ and serve more poor people.

This question is excluded from large parts of the aid debate because those who care about aid tend to support charitable organisations, so they tend to see poverty reduction through the lens of direct support for the poor. The problem, however, is that charity does not produce sustainable development, so has low economic rate of return, and is more a matter of emergency response than effective change.

Development NGOs tend to be driven by passionate commitment to making a difference in the lives of poor people. They often focus on ‘transformative’ strategies such as change in cultural norms, emphasising the human rights of the poorest. This is good, and I don’t really criticise it in itself. However, in terms of strategic analysis of poverty reduction, there is a compelling argument that indirect strategies aimed at lifting overall economic growth are the most effective.

In my opinion the best ever aid project in the world was when Deng Xiao Ping asked Lee Kuan Yew for advice in turning Guangzhou capitalist, and Singapore sent dozens of experts to China to help eradicate the policy culture of Maoism. The result of this and related change in China has been an explosion of growth, with China single-handedly achieving the Millennium Development Goal of halving extreme poverty. The key was strategic policy. By comparison, lauded activities such as the Grameen Bank are piddling.
So why don’t aid donors seek to replicate the Singapore-Deng model? Basically, rich taxpayers see aid as charity, a symbol of their personal generosity, and think that businesses should be ignored because they are already better off than the poor. Taxpayers are the principal and aid agencies are the agent, responding to the prejudices of the principals. So rather than fixing the business enabling environment in poor countries, taxpayers would prefer to help a destitute woman get a sowing machine to show they are helping directly, ignoring the gross dis-economy of scale in this approach. It would be better instead to focus on private sector development, removing the constraints to business expansion, so that firms can provide jobs and customers and services for the poor.

We should not think of donors as ‘delivering aid’ but as potential catalysts of economic transformation at national or sub-national level, just as Singapore catalysed the growth of China, and Jeffrey Sachs spectacularly failed to catalyse the growth of Russia. This catalytic approach provides the economic growth that enables poor countries to raise resources for social services through local tax, avoiding the dependency that results from the ministrations of the charities of the world.

Rather than microfinance, it would be better to address the market failure in the banking system by looking at why loans are not given to firms at the margin of bank lending. The overall issue is that poor countries say help our economies grow, and rich countries say that doesn’t play in Peoria.

I can see why many would like this quote:

“I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.”

… but it reads to me as sort of it’s own grand theory.

Edison and his thousand tries at the light bulb, etc.

For all the pooh-poohing and looking down their noses in the academy at self-help gurus and “New Age” prophets, in many respects, the perseverance principal is central to the best of their thinking, and why they’re popular.

The academy tends to analyze and dissect ad infinitum, competition for prize spots too often its m.o. — if it learned the more graceful art of synthesis and incorporating all experience without judgment, we might have a stronger and more productive education system.

Here, the women condemned Western elitism. In the Western world, the liberal elitists have a complex system for excluding fine thinkers who haven’t been socialized into their norms.

We can learn from these woman and Ms. Novogratz: the temptation to look only at the inspiration, and not the biases we all carry with us. We fail to recognize the West African women in all of us, in more than one way.

Loved this quote:

“I’ve learned that many of the answers to poverty lie in the space between the market and charity and that what is needed most of all is moral leadership willing to build solutions from the perspectives of poor people themselves rather than imposing grand theories and plans upon them.”

Much to be learned, here.

Great entry.

Please excuse editorial oversights and errors in rhetorical tone. Juggling at present,

I know everyone who reads this blog also watches The Apprentice on TV. “Apprentice” candidates survive in part because of their performance in the boardroom (defending their work, fending off attacks from competitors), and in part because of their performance in the task (making the biggest profit). Most winning candidates are good at both, but what is demonstrated consistently is that being exceptionally good at one or the other, and particularly at boardroom performance, can get candidates a very, very long way.

While failure is sometimes acknowledged in the boardroom, unless it is done within a generally glowing account of success, and often laying the blame somewhere else, the candidate wont last.

With “development” work, where ways of measuring task performance in the large majority of cases are inadequate at best, the boardroom performance becomes far more important. This has a knock-on adverse selection problem – the judges, those at the top of the development industry, are likely themselves people who excel at boardroom performance.

In such an environment, having someone go to lengths to show evidence of why the team has failed at the task will face the risks that Jacqueline Novogratz faces.

The Apprentice Theory of International Development has been copyrighted – Prof. Easterly welcome to get in touch if he wants to extend it or otherwise incorporate it into his work.

George