Social Funds and MicroFinance  and the Role of Impact Evaluations

1. Social Funds and MicroFinance and the Role of Impact Evaluations David Ellerman University of California at Riverside and WWW.Ellerman.org

2. Analysis of Selected Developments Ideas (or Fads) • First rule of development assistance is: "Do no harm" • Thus analysis needs to start with criticism of ideas or fads that are "unhelpful help." • Wisdom and possibility of genuine help may come later after working through ideas. • Examples: social funds and microfinance supported by impact evaluations. • Recurrent patterns of unhelpful help are "anti-poverty traps" for development agencies.

3. Example of Social Funds • Social funds are "special clean technocratic agencies" outside sectorial ministries. Often answer to President. • Funded by hard currency loans and donor funds. • Salaries often outside civil service standards. • Bypasses ordinary government channels. • Makes (near) grants to communities to fund local infrastructure projects or other accepted community projects. • Not intended simply as disaster relief but as an instrument for local infrastructure development.

4. Social Funds Controversy at WB

5. “Alice in Wonderland” Discourse

6. Social Funds and Disaster Relief • Constant need to rethink relief work from development perspective since "relief" is often more long-term than expected. • Main idea: promote autonomy and active-agency of "relief clients". • Example: After earthquake or other disaster, promote self-help owner-builder programs to rebuild housing. John F.C. Turner's work. • Always ask how people could do more for themselves rather than being the objects of relief or humanitarian charity.

7. Second Example: MicroFinance • Major current development fad is loan-led (as opposed to savings-based) microfinance projects. • Off-the-shelf packages with NGOs as intermediaries for quick heart-warming results. • Even Internet-based MF loans, e.g., www.kiva.org • Discourse of "helping the poor," "job creation," "entrepreneurship," & "business development". • Much publicized "success stories".

8. What's Wrong with MicroFinance ? • Most microloans consumption-oriented, not businesses. • Off-the-shelf loan-led programs lack the capacity-building of savings-based programs which take longer to develop. • Unemployed poor are not "entrepreneurs who need finance" but it is a lovely fantasy. • Few "businesses" that start with microcredit are easy-entry & subsistence-level with no growth potential. • Much publicized success stories could get ordinary loans—but are happy to get subsidized MF loans. • Often has negative crowding-out effects: • Shuttle-traders crowd out local producers and merchants. • Externally funded micro-credit orgs with subsidized operations crowd out development of local SME banking.

9. MF and “Asset-based” Poverty Reduction Strategies • Those who have assets tend to see society through the lens of the market where wealth opens all doors and secures all needed cooperation. • Many poverty reduction strategies see world through the same market-oriented lens of the rich. • But the “wealth” of the poor is their numbers if they can only achieve the social organization (e.g., coops, second-tier support orgs, and other orgs & alliances) to use that power for social, economic, and political advancement. • MF puts the focus on individual (family) actions to increase income and accumulate wealth—as if “poverty” was only a lack of assets rather than the lack of the capacity, trust, and ‘social capital’ to organize to advance one’s interests in a social manner.

10. Recent e-mail on MF • "The one thing that I learned during my fieldwork in *** was that the textbook informal entrepreneur, the one featured as the typical success story of any microfinance scheme and in the development literature, is in fact really hard to find, if he exists at all. The great majority of the 50 "microentrepreneurs" of the voucher scheme I interviewed were merely people struggling to survive and to diversify income-generation activities on a very low scale of productivity and without any realistic growth potential. None of them had a clear business-idea or showed any entrepreneurial spirit in a Schumpeterian sense. This was very eye-opening and I have since developed an allergic reaction towards the over-optimistic assumptions of development rhetoric that portray the poor in the less developed countries as sleeping beauties eagerly waiting to be kissed awake by a prince called microfinance or any other business development form of aid."

11. Role of Impact Evaluations • Continuation of "unhelpful help" like many social funds and MF projects is "justified" by positive (impact) evaluations. • Hence the debate over SFs and MF requires an analysis of impact evaluations.

12. The Impact of “Impact Evaluations” • An evaluation of X means comparing the benefits to the costs of X. • The “costs” are not just a past expenditure but are the benefits foregone from the best alternative use of that same expenditure (which economists call the “opportunity costs”). • A so-called “impact evaluation” of X ignores costs (explicit or opportunity costs) of X and looks only at benefits or impact of X. • The true counterfactual would be to compare those benefits to the benefits of the best alternative use of the same resources. • The phony “counterfactual” used in “impact evaluations” is to compare those benefits to those of the alternative that uses no resources, i.e., the alternative of no program or “treatment.” • If the program has, say, $1000 of benefit compared with $0 benefit of no program, then the program gets a “positive impact evaluation”—even though it may have cost $1,000,000. • Development agencies and donors keen to get “positive” evaluations of their programs are understandably quite enamored with “impact evaluations.”

13. Plan A versus Plan B • "Patient" has infection: • Plan A = taking "aspirin" which relieves symptoms. • Plan B = taking "antibiotics" which cures infection. • "Doctor" has organization prestige and stake in plan A and controls funds to evaluators. • Evaluators' impact evaluation compares Plan A to counterfactual of no treatment, and finds Plan A has positive impact ("reduces fever") so evaluation is positive. • Yet in any side-by-side benchmarking evaluation between Plan A and Plan B, Plan B would easily win.

14. Impact Evaluation in Dev. Agencies • If medical research was based on "impact evaluations" then we would never get beyond medicines that give only symptomatic relief since that is "better than nothing." • But if the "medicines" a development agency has give only symptomatic relief ("throwing money at a problem without capacity building"), then impact evaluations are perfect to give ultimate low-hurdle "positive" evaluation and continue the business.

15. Major program to push Impact Eval. at World Bank • "Impact evaluations assess the specific outcomes attributable to a particular intervention or program. They do so by comparing outcomes where the intervention is applied against outcomes where the intervention does not exist. An appropriate comparison group represents what would have happened in the absence of the intervention. By establishing a good comparison of outcomes for these two groups, an impact evaluation seeks to provide direct evidence of the extent to which an intervention changes outcomes." (italics added) • Source: On the World Bank's website, www.worldbank.org, click on "Data & Research", and then "Development Impact Evaluation Initiative" to find this description of DIME program.

16. Recent e-mail on impact evaluations • "The problem is that microfinance as a development tool is so popular with politicians and donor agencies, mine included, that one is considered a whistle-blower if talking about the apparent shortcomings of MF. Consultants, who are actually often the ones who undertake the evaluations you rightly criticize, are, allow me, the worst. But as you will know from your time at the Bank, a desk officer is happy about any form of positive written statements by "outsiders" concerning project impact, sustainability, gender empowerment and whatever fad is currently en vogue. At least in my case, no one would dare to care about the methodology of impact analysis or feasibility studies...as long as they are positive: "Oh, the impact analysis is positive? Great!, write a letter to the Ministry at once!". Worse yet...in a world where not only the bilateral donors are under pressure to disburse, but the relevant ministry as well, no one there would care either...."

17. Genuine Evaluations • Econ 101: An evaluation of Plan A compares it to the best alternative, Plan B, using comparable resources. • Evaluation is pointless if not embedded in a social learning program. • Decentralized social leaning programs should: • Promote experiments, Plans A, B, C,…, • Real-time benchmarking between programs, • Cross-learning between experiments, and • Ratchet up performance of all programs (and repeat).

18. “Anti-Poverty Traps” in Development Agencies • In addition to poverty traps in poor countries, there are "anti-poverty traps" in development agencies. • An anti-poverty trap is a program that is popular in development agencies because it gives quick heart-warming small-scale poverty reduction but is a trap because it retards sustained development of economic capabilities. • Social funds give quick local projects but retard capacity for infrastructure development. • MicroFinance gives quick heart-warming results at local level but may retard local producers/merchants and small business finance. • Popular anti-poverty program for native Americans is now to allow them to set up casinos, i.e., to contract with casino developers-operators to put them on reservation land. "Resource curse" where resource is slot machines. • Remittances from labor migration to North gives a quick poverty reduction to some communities in South but retards their own development of productive capacity.