In a new Q&A, David Roodman explains why he has decided to write his new book on microfinance in public—via a blog where he posts chapters, poses questions and shares what he has learned—and describes how this innovative process is helping to shape his manuscript. Spoiler alert: in a recent CGD working paper, Roodman and co-author Jonathan Morduch conclude that evidence on the positive impact of microcredit on poverty reduction is surprisingly thin.
Q: You’re writing your book about microfinance out in the open, posting draft chapters and blogging about the book-writing. How is that going?
A: It’s been a revelation. Book writing—made powerful by the invention of movable type—and blogging—made possible by the Internet—are analogous. Both are ways for people to share their knowledge, questions, and ponderings with a large audience. But the blog, in its immediacy and perhaps its informality too, makes the book seem old-fashioned. Why not engage readers as you go and learn from them, I wondered. The idea began as a way to post draft chapters online for comment, but at Dave Witzel’s encouragement I opted to blog. The "open book" has served me in several ways. It has prodded me to record thoughts as they arrive, so that I don’t lose them. It has begun the outreach to an audience. Commenters have asked helpfully provocative questions, pointed me to things I should read, and critiqued drafts. I’ve come to see that the blog makes public something that is usually invisible: the webs of thought in my head. And it has influenced the style of the book writing, making it a tad more informal. Blogging a book takes time, but I recommend it for people writing about subjects of broad interest. I’ve posted drafts of four chapters so far.
Q: Why do we need another book about microfinance?
A: Sometimes the development business seems like a merry-go-round of fads—infrastructure investment, integrated rural development, structural adjustment, governance, infrastructure investment, etc. Thinking often seems driven more by hope than evidence. Is microfinance more than a fad? My goal is to perform a critical but open-minded analysis of the claims for and against microfinance, to probe deep into technical arguments, and to offer my take with a minimum of jargon. I think this is the most thorough such attempt yet. This project is warranted precisely because of all the public interest and the powerful incentive for promoters to simplify reality in order to raise money. I worry that mythology about microcredit in particular (as distinct from savings and insurance) is distorting what financial services reach the poor.
Q: What have you learned that surprised you most?
A: It turns out that microfinance has deep historical roots. Around 1500, affluent Englishmen started putting charitable loan funds in their wills. In the 1720s, Jonathan Swift lent 5 or 10 pounds at a time to "industrious tradesmen" in Dublin while exploiting the joint liability technique associated with today’s group-based microcredit. Much of modern microfinance traces to the European cooperative movement of the 19th century, which arose as a response to the problems and possibilities of rapid industrialization. Just over 200 years ago, an Englishwoman named Priscilla Wakefield pioneered savings banks for the poor. Just over 100 years ago, the British introduced credit cooperatives into what are today India, Bangladesh, and Burma. This is not to suggest that modern microfinance is not an achievement. As in the history of any important idea, each new generation introduced innovations. And only those with organizational brilliance turned ideas into action.
Q: Is today’s microfinance living up to its reputation for reducing poverty?
A: Many researchers have pursued that question by analyzing survey data to determine whether microfinance is making people better-off. But the result of those studies have been inconclusive. I decided to replicate the leading studies by applying their methods to their data on my computer. In one case, I had to write a fairly complex program, which is now available to others. I collaborated with Jonathan Morduch at New York University, a leading scholar in the field, who did important analysis in this direction a decade ago. Our conclusion, just published in a CGD working paper, is rather stark. The leading studies claiming that microcredit cuts poverty do not stand up. Our point is not that microcredit does no good, but that most available data make it very hard to tell one way or another. If microcredit and relative affluence go hand in hand, it is extremely hard to ferret out which causes which—maybe less-poor families borrow more. New randomized studies will shed more light; so far their findings of impacts are rather muted.
Q: Does that mean microfinance has failed?
A: No. It does suggest that microfinance is overhyped and that a realistic understanding requires nuance. More broadly, it means that there is more than one way to define success for microfinance, indeed to define development. When I visited microfinance programs in Egypt and Bangladesh, I saw hundreds of women throng to local bank offices or assemble for group meetings to voluntarily partake of microcredit. By night, I worked on the analysis I just mentioned on my laptop. Should I, an alien with little understanding of these women’s choices and struggles, tell them not to borrow because I had determined on my computer that microcredit might not be so good for them? Of course not. Reading authors such as Stuart Rutherford and Elisabeth Rhyne led me to view microfinance through two other lenses: development as freedom—Amartya Sen’s idea that development is about gaining more control (agency) in one’s life—and development as institution-building—which goes back to Joseph Schumpeter’s contention that creative destruction is central to economic development. From these perspectives, I ask: Does microfinance give people more control over their circumstances (or less, given the possibility of debt traps)? Does it enrich the institutional fabric of nations? Those questions get chapters too.
Q: Can you give us a sneak peak of the conclusions?
A: It turns out to be difficult to generalize about when microcredit increases people’s freedom by giving them a new source of capital and when it decreases freedom by drawing them into a complex of peer pressure and over-indebtedness turns. Savings do not raise the same concerns—we worry about over-borrowing, but not over-saving. And clearly microfinance has given birth to some thriving, competing, innovating, customer-oriented institutions in such places as Bangladesh, Bolivia, and Indonesia. So microfinance, especially if broadened beyond credit, looks pretty good overall through these lenses.