October 15, 2006 09:47 AM
http://commentisfree.guardian.co.uk/daniel_davies/2006/10/three_microcheers_for_microcre.html
It is churlish to have a go at someone on the day he wins the Nobel Peace Prize. And Muhammad Yunus is clearly an ornament to the somewhat chequered reputation of that prize rather than a detriment. Even when you strike out some of the genuinely embarrassing winners like Henry Kissinger, Yunus still looks OK - he is not in the league of Mother Theresa when it comes to having a poor ratio of money spent to results achieved for example.
However, have a bit of a go I must, because it would be a much greater shame if the publicity surrounding the Peace Prize award were to have too much influence on foreign aid policy. The fact is that many of the more grandiose claims that Mr Yunus is prone to make for microfinance don't really stand up.
Jonathan Morduch, a Harvard economist who is in general a supporter of microfinance as a part of aid policy, carried out two studies of the costs and benefits of microfinance in 1998 and 1999. Surprisingly few rigorous studies have been made of microfinance, but Morduch surveyed them all and carried out some further empirical work of his own. The results were decidedly more mixed than much of the publicity material that Grameen Bank puts out about itself would suggest.
In so far as I can summarise them, the conclusions of Morduch's work were that microfinance works much better for the "quite poor" than the "very poor", and that the loans made were as often as not used for consumption rather than investment in entrepreneurial businesses. Morduch's work also suggested that microlenders are more or less impossible to run on a self-financing basis if they are to stick to the mission of lending to the poorest, a conclusion which is now accepted across the microfinance industry.
These are not trivial benefits; there is a very big tranche of people in the category who can be helped by microfinance, and the ability to smooth consumption by borrowing is a very important thing indeed - I wouldn't go quite as far as to say that "access to credit is a human right", but Yunus has a real point when he says this. But they do mean that microfinance can't be used as a substitute for an actual development policy. After all, Grameen Bank has been going for 30 years now and Bangladesh is still one of the poorest countries on earth.
It's quite arguable that the real benefit that comes from microcredit is simply the fact that it doesn't give grants. I am in general quite in favour of small user fees for most development aid, based on the principles set out by JK Galbraith in one of his least-known but best books, The Nature Of Mass Poverty. In it, Galbraith argues that poverty is an economic equilibrium and that most very poor populations are "adapted" to it and that most aid will therefore have a temporary effect at best.
He suggests that development aid (as opposed to emergency aid) should instead be concentrated on the "non-adapted minority" of people who aim to leave the poverty equilibrium rather than staying in it. In other words, although I don't think that this specific formulation is in Galbraith's book, the rationing effect of user fees is actually salutary, because it means that the aid will go to people who plan to do something with it. This is in many ways an unfair way to distribute aid, but to be honest we have tried fairness for the last fifty years and the results have been terrible. I suspect that Grameen Bank's successes, where they have occurred, have been a result of selection of this non-adapted minority.
The main effect of the microfinance revolution has been the rebranding of agricultural development banks as "Microlenders". This has happened because although a loan to buy a tractor or provide working capital for a harvest season isn't microcredit, calling it microcredit will bring in a lot more grant money. That's probably good news, because agricultural development banks usually do good work.
So good luck to Muhammad Yunus and I hope he enjoys his prize. But if you work in government or a major aid agency, perhaps take his acceptance speech with a pinch of salt.
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Colin Brace
Amsterdam