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You might know that I am writing a book about microfinance in public, via blogus. I'm working on the last chapter now, and that has me in a reflective mood. Here, I'd like to share one big idea that I discovered by writing the book. I am fired up about it, and I'd appreciate feedback on whether it is dumb, old, useless, or all three.

Here's how I explained it last December:

I am reading now for my chapter 8, which assesses microfinance from the point of view that the essence of economic development is the creative growth of new institutions---in this case, microfinance institutions. [T]his perspective casts Muhammad Yunus as a Henry Ford, a visionary who helped spawn a global industry with novel techniques to mass produce a valued product. The Grameen Bank he founded employs thousands, serves millions, competes, and innovates. The histories of the United States and other rich nations can be seen as streams of such business successes, which together facilitated mass escapes from poverty. In this light, the success of big microfinance institutions from Bolivia to Indonesia is economic development. (On Yunus and other microfinance pioneers, see chapter 4.)

That's a big idea. So is "development as freedom," the evaluative perspective of chapter 7. I confess that both these ideas originated in a more mundane effort, my attempt to mentally organize great books I'd read. While working in 2008 on the Pitt & Khandker replication, which involved crunching a lot of numbers on a computer, I visited microfinance programs in Egypt and Bangladesh. As I wrote in chapter 6, seeing women crowd into a branch of the Lead Foundation in Cairo to get new loans forced me to confront this paradox: thanks to work on the computer back in the hotel room, I was concluding that there was little solid evidence that microcredit helps on average---yet who was I to tell these women what to do with their lives? Two months later I visited Bangladesh, first tagging along with Stuart Rutherford in and around Dhaka, then taking an overnight trip into Rangpur district...

As I rode in the van along rutted roads snaking through rice fields, I realized that several notions of success were at play in the grand conversation about microfinance. The econometricians had theirs: statistical proof of average change in indicators of poverty. In my mind, Stuart represented another view, which connected with the "development as freedom" perspective of Amartya Sen, himself a native of Bengal territory. Chapter 7 began on that ride as my Stuart Rutherford chapter.

And at that moment, chapter 8 began as my Beth Rhyne chapter. Beth has long been an eloquent and energetic proponent of the institutional view of microfinance success.

The institutional view can be rooted in the work of Joseph Schumpeter, who emphasized the evolutionary nature of economic development and the constant necessity for entrepreneurs like Yunus and Ford to disrupt the status quo with "creative destruction."

So the heart of my book is three chapters (6--8) that evaluate microfinance in light of three different definitions of success, which are really three different conceptions of "development":

  1. Development as proven poverty reduction
  2. Development as freedom
  3. Development as industry building

Each conception generates distinct empirical questions. The first leads one into the pros and cons of randomized trials for evaluating impacts, among other things. The second leads to an interest in when microfinance "empowers" women---and when it traps them in debt. The third took me into the question of when growth in credit constitutes and contributes to healthy economic transformation and when it is just a bubble.

I suppose my analytic style comes out of having survived my parents' bitter divorce by not taking sides. I try to find the good in what everyone has to offer, then integrate it all.

"Development" is a vague word in English. It can be an outcome (as encoded in the Sen-inspired Human Development Index), a specific activity (as when an aid agency "does development"), and a process (which I think is its root meaning). So in fact the various conceptions of development I listed are not really parallel concepts. The first is about outcomes. The last is about process. The second is a blend since, Sen argued, freedoms are both ends in themselves and means to other freedoms (as when democracy prevents famine).

Despite the muddiness, I've found my simple construct essential in sizing up the broad class of interventions we call microfinance. I think it is interesting and important to note, for example, that microsavings generally outperforms microcredit on all three definitions. It has been shown in one randomized study to raise incomes (among women in a Kenyan market town), which cannot be said for microcredit; people can’t lose freedom by saving too much but can by borrowing too much; and financial institutions enrich the domestic economic fabric more when they take savings locally and lend locally, rather than solely channeling credit from the antipodes.

I'm curious now about how to extend and systematize this kind of thinking. Are there other useful definitions of "development" (as a process or outcome or activity)? Bill Easterly, for example, writes of Planners and Searchers. Not that Planners aren't important in development, I think he says, but if you're an outsider wanting to help, support Searchers like Muhammad Yunus. Zak and Knack have faith in the importance of trust in economic growth. Nancy Birdsall emphasizes the role of the middle class. If that's the key, she has suggested to me, then perhaps rich countries should drop their barriers to goods and services from all poor countries, rather than conditioning openness on good governance or economic policies, on the idea that the more independent sources of economic power there are in a poor country, the more responsive its politics will become. And so on.

Where else besides microfinance could it be useful to frame evaluation by inventorying conceptions of development? And could such an exercise help with efforts to define development (not just aid) policies in the U.S. and elsewhere? To engage in facile rhetoric, how can you have a development strategy without a development theory?

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CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.