Here is a quote from the Banerjee, Duflo et al. paper that was cited in the Small Change article from the Boston Globe.
On balance our results show signi…ficant and not insubstantial impact on both how many new
businesses get started and the pro…titability of pre-existing businesses. We also do see signifi…cant
impacts on the purchase of durables, and especially business durables. However there is no
impact on average consumption, although the effects are heterogenous, and as we will argue
later, there may well be a delayed positive effect on consumption. Nor is there any discernible
effect on any of the human development outcomes, though, once again, it is possible that things
will be different in the long run.
So, business profits are up, new businesses are started, and durable goods acquisition increases. Is this really "small change?"
Only small to those who thought a $1 loan would make everyone have the same per capita income as the U.S.
ReplyDeleteI would be interested to see a return on investment compared to other potential uses. As many small loans, there is probably also significantly less risk than spending on one large public infrastructure project.
To the extent that microcredit has been taken up by private firms without public subsidies suggests that it is not an "either or" type of development decision. Instead the public sector can focus on other areas.
Business start ups and profits went up - this is not a small change as the effects of this will accumulate and will prevent the current generation from falling into the trap of poverty and also prevent the future generation from being born in poverty. The article states; "However there is no
ReplyDeleteimpact on average consumption" - may be they are measuring well being in terms of increase in consumption. However, microcredit as I had stated earlier can also act as a form of social insurance which would mean that it might not necessarily increase consumption but rather help in consumptoion smoothing. Hence, simply measuring increase in consumption might not be the best way to measure the impact of microfinance.
- Aparajita Singh
This is probably due to the characteristics of economics, or can also be expressed as difference in perceiving values, because impacts in starting business or durable goods acquisition could not be an appropriate scale for the economists- especially macro- who regards the "consumption" (or GDPs, unemployments, etc) to be the most efficient measurement for economic development.
ReplyDeleteI feel like the author of this quote is somehow discouraged by the small outcome in the shortrun, believing that the consumption would increase in the longrun. However, hasting for immediate reaction should not be the stance to progress any kind of projects.
Is it possible that there is a significant lag in the time these supposedly "small changes" have a quantitative effect on consumption? Is data on such a statistic even readily and credibly available? As Aparajita emphasized, perhaps we need to focus on measures of success outside of the typical realm of economics. Small and medium size businesses are the engines of economic progress in the US and they are providing the necessary forward momentum to propel developing nations. Perhaps we should more hesitant to poke holes in such an important project.
ReplyDelete-Logan Pettigrew
I think it is important to look at the timing of these "small" changes. People want to see immediate results, and that just is not how microcredit works. The small loans that result in business startups, increased consumption of durables, and other things need time to fully develop. The fact that profits are up, businesses are being started, and purchases of durable business goods is increasing says enough. The effect of microfinance is great, and it should not be considered a "small" change.
ReplyDeleteI feel like these "small changes" seem to be small right now aas these small loans from micro-finance are increasing the purchase of durable goods and business startups. However, these small loans aren't just going to turn into a very profitable business. A lot of them are loans that get these small business started, yet don't see that much profit, obviously as a start-up business that sells chairs it has made isn't going to turn into a money maker. However, in the long-run I see that as these small businesses have time under their belt, there will be a increase in consumption. I do see that larger investments to bigger businesses will increase consumption and would be a bigger change. However, I do this being the foundation for economic progress in these undeveloped countries, and will be rather important changes than "small changes."
ReplyDeleteWhat I found most interesting in this article was a statement made by David Roodman:
ReplyDelete"The picture that emerges is not of people climbing out of poverty through microenterprise, but people doing what they need to to get by."
I think that often as we simplify the poverty problem, we lose sight of the scope and extent of the problem. Microcredit is a strategy to alleviate poverty, but it is only one strategy. The strategy is innovative in targeting small entrepreneurs, but I also acknowledge the validity in this statement as well:
"What these countries don't have enough of are the kinds of steady jobs that more reliably raise incomes, and the sort of enterprises, often quite large, that provide them."
-Sarah Miller
I agree with what others have said about looking at the effects of microfinance in the long run. I wonder what effect the increase in the purchase of durables now will have on consumption in the long run. I think economists need to be hasty in judging microfinance as a "small change" when the long term results have not yet been analyzed. The author of this quote even writes "there may well be a delayed positive effect on consumption."
ReplyDeleteI think that the effects on consumption are only one aspect of whether microfinance is successful or not though. The other positive factors such as gender equality and the ability to achieve a steady income are in many ways just as important as increasing consumption. I think it is impossible to judge the effects of microfinance at all right now besides looking at the initial positive effects it has had.
I'm glad that this contradiction has been recognized - increases in profits, number of startups, and durable good acquisitions cannot at all be qualified as a small change. If loans as small as those made by microfinance organizations can make this much of an impact - that's a significant change. Being able to increase access to credit and increase savings is a huge step in assuaging the established "vicious cycle of poverty". Further, I agree with classmates that analyzing the long term effects of microfinance initiatives is more important than drawing initial conclusions about its effectiveness over a 2-year period.
ReplyDeleteIt seems that by focusing only on how changes specifically effect "the human development outcomes," it's easy to lose sight of the overall good that such changes are doing. Although an increase in business success and the purchasing of durable goods may not equal an impact on average consumption, such increases do still suggest positive changes. Any step in the right direction, no matter how small, should be noted as a success, especially because more profitable businesses and the ownership of durable goods will continue to improve people's lives in the future; these things aren't just one time benefits that will immediately fade away. These improvements seem to show a positive change in business technique, and who's to say that if one entrepreneur learns how to make his or her business more successful, other's won't learn and benefit from this as well?
ReplyDeleteI think another fact that is being overlooked in this discussion of the effects of MicroFinance is the nature of these developing countries. As has been stated numerous times in class, the path these nations will take in their development course greatly deviates from the path of the currently developed/industrialized nations. Maybe it's impossible for us to conflict our standards of success on these nations given the stark difference in barriers they face. Furthermore, even when development is reached, the economies in these nations won't simply be 'clones' of current developed nations due to social, political and cultural issues. We are too quick to pass judgment passed upon western standards without adequate consideration of the other issues and factors involved.
ReplyDelete-Logan Pettigrew
Logan brings up a good point. The general instability of developing nations plays a huge role in potential economic outcomes, especially growth.
ReplyDeleteThe fact that MicroFinance is positively impacting investment in business ensures long-term growth. I feel like that is much more important than overall consumption of durables, particularly if those durables are luxury goods.
That said, MicroFinance seems to be propelling long-term growth, which I would not qualify as a "small change."
Prof. Anderson says in Econometrics, "Economics takes a flashlight and shines it on one particular area. You can see that little corner of the world very well, but not anything else."
ReplyDeleteAs Aparajita said, measuring increases in consumption may not be the best way to quantify the effects of microfinance. I've tried and measuring consumtption is a notoriously difficult task that is itself only a proxy for measuring income levels.
On the ground working with an MFI in Peru, I would describe the most obvious benefits of microfinance as psychological. Women felt that they had support and an opportunity to better themselves. Until these and other alternative measurements of development are considered, microfinance can not be marginalized as ineffective.
I know this is your typical social science cop-out answer but I think there is much truth in it: it depends. I think that these changes are most definitely "small" in terms of the relative good that they are providing towards growth development RIGHT NOW, but as others have mentioned already, all that really matters is what positive development changes these microfinance projects can induce in the long run. These changes are small but in fact are just a foundation for future development to take hold and prosper. Rome wasn't built in a day.
ReplyDeleteFor people expecting a huge reduction in the amount of people in abject poverty and an immediate increase in child health and literacy, these results may seem small. The fact that micro-finance is so new should encourage others to wait to see the benefits it can reap. One cannot expect such immediate and drastic changes because we simply have no evidence that this will occur. What one can hope is that these initial "small changes" create a positive multiplier resulting from new businesses, savings, and investment.
ReplyDeleteFurther down the road as more and more people begin to see the positive effects micro-financing can have, more people will understand it is a process. The benefits take time to bear their fruits, but with initial increases in small businesses, profits, and purchasing of durable assets; the long run looks very optimistic. All in all I would say it is unfair to call these changes small. An individual's perception of what micro-finance should accomplish can sway how they feel it is progressing, and perhaps there needs to be a reassessment of realistic short-term and long-term goals for micro-finance.
It is not really a small change because it is having an appreciable effect on the overall economy. Developed countries' economies move at a much faster pace than developing nations and we cannot therefore think of developing nations with the same set of rules as we use for our own economy. What we consider to be an insignificant dollar amount can stretch much further in developing countries and therefore our perceptions are often biased when looking at results.
ReplyDeleteIt certaintly doesn't sound like a small change. I agree with others that the effects need to be considered over the long run-- and it is possible that an increase in consumption will follow the increase in business profits, starts of new businesses, and durable goods acquisition. These changes show that small micro loans are going beyond the individual borrower and improving other aspects of the economy. However, while I think the changes in the economic sector due to microfinance are significant, they might be called small in the article because relative to the fast-paced economic growth trying to be accoomplished in the developing world, microfinance does seem not be a key tool.
ReplyDeleteIt seems as though critics are basing their skepticism on the stability of the level of average consumption demonstrated in the report. This is of little surprise coming from a consumption/ "instant gratification" driven society. I will reiterate yet again that the skeptics cannot see beyond the short term consequences, which even then show great promises with increases in businesses and durable capital. All the criticism really can be simplified to the nature of US society...5 years is long term, consume, consume, consume, and wealth = happiness.
ReplyDelete-Benjamin Ersing.
I truly do not understand how this can just be viewed as small change. With new businesses being started, prior businesses becoming profitable, and increased expenditures on durable goods, this is exactly what microfinance aims to do. On the other hand the concepts of average consumption and overall development are clearly long term effects that will definitely take awhile to take effect on a whole population. But to think that there are that many short term consequences out there, that should really serve to encourage people that microfinance initiatives are in fact successful.
ReplyDeleteOne of the largest problems in recent years is that much of the world has become so focused on the short term that the long term is often forgotten. Short term growth means little to nothing if it harms people in the long run. News like this is very welcome and creates hope for the future because it shows that investment is happening and that poor people are capable of thinking in a long term fashion. By investing rather than consuming immediately, long term growth is being emphasized and a strategy continuing this sort of thinking through education as well as aid should be undertaken in order to allow poor nations to grow and alleviate global poverty rates.
ReplyDeleteThis is not a small change at all. This, again, brings to mind Sen's idea of the freedom to make one's own choices. The clients of microcredit banks are granted that freedom when their income increases and when they start their own businesses. As poor people across the world are making decisions that would have only been dreams a decade ago, I don't see how that can be classified as a small change. Microcredit could also grow on itself and as more enterprises are started, more jobs created, less jobless people are living in the developing world, that is also a big change. A big change that will hopefully keep getting bigger.
ReplyDeleteAs so many others have said, I don't think this qualifies as a small change. I think it is fair to say that it is smaller that many expected and it is definitely smaller than we would like to see. But once again, this is an extremely short term evaluation of the benefits of microfinance and the long-term benefits remain to be seen. Increasing the number of business start-ups, increasing the profitability of existing businesses, and increasing the amount of capital (or durables) owned by entrepreneurs in the developing world are the goals of microfinance and this is, according to the study, what microlending has achieved. And the psychological impacts not measured by the study are great as well. The people receiving these loans are becoming empowered. Although there may not be an immediate increase in consumption or in the "human development outcomes", this empowerment may lead to these increases later on down the road. One of the first things students in an Intro Macro course learn is that investment in capital, which is what increasing durables amount to for an entrepreneur in the developing world, is a trade-off between consumption today and consumption in the future. I would like to think that the stagnant consumption means that those recipients of microloans are still waiting for this future.
ReplyDelete