Rhetorical Blast from My Past

Yesterday, I mentioned the 2007 report Role Reversal by Julie Abrams and Damian von Stauffenberg. The report made a big splash, with coverage in the Economist and an online debate on the Microfinance Gateway. It argued that international financial institutions such as the EBRD and IFC were crowding private investors out of what was properly their space in microfinance, and preventing the commercialization of the industry.As I blogged yesterday, the recent microcredit financial crises renew the relevance of the issues raised by that report.Just starting to find my way in the field, I made one contribution to the online debate. I recently reread it and liked it more than I expected. It was nice to see my promise, and how I have grown since. See what you think:

March 28th, 2007 at 2:11 pm I am a newcomer to this field, so let me ask questions I don’t think are answered in the report. I’m being provocative here, which I know Damian will appreciate–or maybe just naïve. Please do not assume a fully formed point of view lies behind these questions. 1. Why is “crowding out” bad? Why should I care? The report appeals to the consensus view that public actors should do what private ones will not, catalyzing private money. That sounds reasonable, but concretely, what might be the costs in this case? 1.1. Crowding out may reduce returns to private money, thereby forcing socially minded investors (who provide essentially all the private foreign capital in this sector), to make deeper trade-offs between earnings and helping. But we should not shed tears for them. (A cynic could read some of the proposed roles for MFIs, such as guaranteeing private risks, as subsidies, directed credit to rich investors in contrast to the subsidized, directed credit to poor entrepreneurs that has earned such a bad name!) 1.2. Lower borrowing costs may corrode institutional development at established MFIs in some way. But is there convincing evidence to the effect that it is bad for the long-term development of Compartamos if its borrowing costs are 6% instead of 16%? And one would hope that competition forces established MFIs to pass lower borrowing costs on to customers, which would seemingly be a good thing. 1.3. Perhaps the point is that private money is inherently different from public money, bringing more discipline. So established MFIs will benefit from owing more to (or being owned more by) private investors. The authors of Role Reversal hint at this idea: “10 IFIs are not primarily profit-driven, thus success is often defined by the amounts that have been lent.” This brings us to the question of how differently we can expect private-sector-minded public investors and public-minded private investors to behave (below). 1.4. Perhaps the problem is the opportunity cost, i.e., official lending to established MFIs is coming at the expense of incubating new ones. Is it? Incubation programs might not cost very much and so may be incapable of absorbing these large flows anyway. The new public money going into top-tier MFIs may be genuinely additional rather than coming out of other parts of the microfinance or private sector development budget. 1.5. Lastly, perhaps the development of private investment in microfinance is dynamic, so that if you flood it out of business today, it won’t be around tomorrow when you really need it. You need this argument to resolve a paradox in the report: IFIs are providing too much money now, but in the long run cannot provide enough. But given the deepness and creativity of rich-country capital markets, the constant seeking for new niches, I wonder how far you can go with this argument. Even if private investment is quashed now, mightn’t it pop up again when the opportunity returns? Or will the scars last? 2. My second question is about how different public and private lenders are. The more similar they are, the more they should be seen as part of a common herd, and the less relevant it is to point to just one part of the herd and tell it to stop stampeding. In other words, is the problem more “crowding out” or “over-crowding”? The increases in public and private investment in microfinance are not a coincidence, but are driven by the same underlying forces–some combination of evidence of effectives, compelling ideas, fad, and the urge to help. The institutional perversities the authors describe in the public sector, such as the pressure to disburse and the desire to be associated with winners, may afflict the socially responsible investment business to some extent too. Moreover, some public investors may be superior in some ways, with longer time horizons. Perhaps a bigger issue is that foreign money, public and private, is “crowding out” domestic investors and savings mobilization (biasing microfinance toward microcredit)–I am not claiming this happens, just wondering. Last week someone gave me a practiced defense of the way he was giving sub-market loans to MFIs even if it undercut commercial investors. After all, he was subsidizing loans for the poor. Could that be bad? And the program he was defending was a private MFI investment project, not a public one. Clearly a deep issue here, which most in this group have thought about more than me, is the proper role of the public sector in private sector development. The IFC and similar institutions are based, roughly speaking, on the idea that the private sector can actually do lots of things better–create jobs, economize on resources, innovate, seek new markets, etc.–except, sometimes, one: provide finance. When is “sometimes”? David RoodmanCenter for Global Development