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David Roodman's Microfinance Open Book Blog

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Milford Bateman's new book, Why Doesn't Microfinance Work? The Destructive Rise of Local Neoliberalism, annoys me in much the way that Dambisa Moyo's did last year. I see myself as open-minded, but I guess I am allergic to (as I perceive it) sloppy thinking. The book makes dramatic conspiracy claims, yet is loose in its reasoning; careless in its use of evidence; and heavy in its use of passive voice and weighty abstractions such as "neoliberalism" that obscure for the reader (and perhaps the writer) who is accused of doing what. I found it hard to get through. (For a kinder (re)view, read Malcolm Harper.)

Bateman is clear about his thesis though:

The central argument...is that microfinance is largely antagonistic to sustainable economic and social development, and so also to sustainable poverty reduction. Put simply, microfinance does not work. I fully accept that there are some minor benefits to the be derived from the widespread provision of microfinance to the poor....But I argue that these benefits are very minimal indeed, and anyway wholly insignificant when set alongside the huge longer-term downsides and opportunity costs inherent in the operation of the microfinance model. To focus upon these few minor shorter-term benefits is to deliberately focus on the few trees left standing after having helped the entire forest to burn down. (pp.1--2, emphasis in original)

Bateman is right to challenge the mythology that was constructed around microfinance in order to sell it to donors. But he commits the error of his opponents in advocating extremism too, just of the opposite tenor. It seems as if his passion about the problems of microfinance, fired by personal experience in Eastern Europe, along with his verbal fluency and a proclivity to view public affairs as polarized ideological battles, override his propensity for critical thinking. The result is a story in which the monolithic "international donor community" chooses to "neoliberalize" microfinance worldwide out of blind ideology, or, worse, a "political" drive to make the world safe for corporations. Bateman is not saying that microcredit directly hurts clients on average but rather that those who push microfinance are powerful enough that they could instead push developing nations onto quite different paths, in particular deploying state-led credit models that he says can be relied upon to deliver development. If it were weren't a captive of neoliberalism, the international donor community could make India and Pakistan, finance-wise, more like China and Vietnam.

Seems a strong claim to me.

On page after page, I found factual misinterpretations and vague, dubious generalizations. Rather than enter a full-on debate with the argument, let me show you examples of how Bateman's passion seems to lead him to select and distort evidence. I find it hard to fully engage with a piece of analysis in which the conclusions so seem to drive the evidence. Think of the right column of this table as my marginalia:

Bateman Me
Muhammad Yunus stumbled on the idea of microcredit on learning that 42 people in the village near his university were locked into debts worth only $42 total. "He decided to cancel this debt out of his own pocket, and was embarrassed to be almost royally feted for such a small sum." (p. 9) Yunus did not cancel the debt, but substituted his lenient, no-interest loans for the moneylenders'. And the cited pages of Yunus's autobiography mention no such hero worship.
"By the late 1980s, microcredit and microenterprise development had become the international development community's anti-poverty intervention of choice." (p. 11) According to a quick tally from the CRS database, the top category for foreign aid commitments worldwide in 1985--89 was agriculture, at $25 billion. Banking and finance was 14th, at $3 billion.
"As leading microfinance advocate Jonathan Morduch admitted..." (p. 13) Jonathan is an academic who broke into the microfinance field by showing that the Grameen Bank took more subsidies than most people realized, then challenging the Pitt and Khandker study claiming that the Bank was reducing poverty. Seemingly, it takes a black-and-white world view to shoehorn him into the "advocate" category.
Bateman argues that while Yunus and other microfinance pioneers initially embraced outside subsidies if necessary to keep interest rates down for the poor, "the international development community soon began to disabuse the microfinance industry of this notion....The rejection of subsidies was essentially rooted in changing politics: specifically, the rapid ascendance of the neoliberal political project....Great efforts were made to commission as much supporting evidence as possible in favour of the chosen trajectory. Famously stepping up to the plate here was a group of mainly agricultural economists based at Ohio State University in the USA, who very conveniently provided a stream of arguments discrediting the notion of subsidies in rural finance and state involvement." (pp. 13--14). Bateman very conveniently skips over the arguments and evidence assembled by the Ohio School, above all about how billions of dollars of government-directed, subsidized credit meant for poor farmers in Brazil, Indonesia, and other nations had been captured by rural elites. Meanwhile, the Grameen Bank was not forced into a neoliberal, subsidy-free form. As Bateman notes, Yunus's views on the proper role of government are similar to those of Milton and Rose Friedman, and presumably long have been. Grameen weaned itself off outside aid less because of ideology than because it prized its independence from donors it sometimes saw as meddlesome. And most of those donors---Norway, Sweden, the Netherlands, Japan, the United Nations---were never that enamored of neoliberalism.
On my work with Jonathan Morduch, Bateman writes, "Regarding the headline-grabbing results in the earlier Pitt and Khandker study...Roodman and Morduch obtained the opposite signs--that is, their results suggested negative impact." (p. 63, emphasis in original) Actually, we wrote: "But we do not conclude that microcredit harms; rather...reverse or omitted-variable causation is driving the results."
"Supporters of the [commercial] microfinance model, centrally including both CGAP and ACCION, initially cheered the Compartamos IPO to the rooftops." (p. 22) Actually, CGAP said that the IPO "provoked discussion and concern within the microfinance community and elsewhere. We think some of this concern is justified and some is not."

Bateman twists the term "impact evaluation" when he accuses almost all evaluators of measuring the financial state and client rolls of microcreditors rather than evaluating the impact on clients. (p. 63)

He compares microcredit to the abandoned Morgenthau Plan to deindustrialize Germany after World War II (pp. 93--101). He says that historically, profit-seeking commercial banks began moving into microcredit "and so out of traditional SME [small and medium-sized enterprise] lending," (p. 17) which lending he views, with some reason, as important for poverty-reducing economic growth. In fact, he accuses the leading Cambodian microfinance institution ACLEDA of drawing conventional Cambodian banks into microfinance and away from lending to bigger businesses and thus "playing an important role in undermining the country's desperate attempts to escape extreme industrial and agricultural backwardness." (p. 102, emphasis in original) Such claims beg the question of why profit-seeking banks would abandon a profitable line of business---or whether SME lending is in fact unprofitable, and why. In fact, the microcredit movement arose in part because of repeated failures to lend effectively to SMEs. Some combination of lack of credit-worthy customers and adverse business conditions makes it hard in many places. Since this was true before microcredit, it should not be blamed on microcredit.

I could go on.

There has been a lot of great research, writing, and blogging on microfinance in the last 18 months. I have in mind not my own work, but all that I have praised from this blog. If you want a realistic sense of what microfinance can achieve, I don't think you need to read this book.

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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.