Letters to the Editor

The difference between calves and cows Microfinance's creator won a Nobel Prize. But does it work? Andrew Leonard [2006-10-31]

• cow - calf = sweat equity

  Andrew, thanks for your enjoyable thought piece on our "Microfinance as Business" report for the Center for Global Development. I have two responses, one narrow, one general.

  What's the difference between cows and calves? Suppose I offer you a loan to buy a couple of shares in an electric company. You earn dividends and pay interest to me. Will this transform your life? Will it even improve it much? Probably not. That's what buying a grown cow would look like to a microcredit borrower. The price of the cow would reflect the value of the milk she will immediately give, so there won't be much profit margin.

  But if the woman buys a calf, then she can put her time into raising it, time that she might not otherwise put to commercial use, especially in places such as rural Bangladesh where women are largely cut off from the market and other public spaces. Or she will multitask, looking after the cow, the kids, and the household all at once. So

  calf + sweat equity = cow.

  If we resuscitate ninth grade algebra from the deep recesses of our minds and apply it here, we get the one true formula for the difference between a cow and a calf:

  cow - calf = sweat equity.

  Now a larger point about the impact of microcredit on borrwers. I'm not arguing here with what you wrote, just elaborating on how I think about the impact of microfinance. The Nobel Prize for Muhammad Yunus and Grameen Bank adds to what was already a lot of hype about microcredit. Microcredit appeals the left as being about empowerment of women and to the right as being about enterprise and self-reliance. Measured against the hopes that are often pinned on it, it is doomed to fall short. BUT if we put aside the hype, and think about financial services as analogous to education, health, roads, telephones, etc.--things we want everyone to gain access to as part of economic development--then I think we can form a more realistic picture of microcredit. In financial services, as elsewhere, it is hard for well-intended outsiders, from the World Bank to the Gates Foundation to Pierre Omidyar, to come in and improve things. It is by no means impossible. But typically the contributions of do-gooders are incremental.

  What I worry about with microcredit is what I worry about with all credit when it is pushed hard by the supplier. Think of the third world debt crisis, or the trouble that some people get into with credit cards and adjustable-rate mortgages. For some, debt becomes a debt trap. That doesn't mean we should ban credit cards or ARMs. Credit is extremely useful. It makes *my* life better. But the dangers of credit should remind us of the need deploy it with care when targeting poor people, with clear and watchful eyes. It is an empirical question whether, in any given place, it is helping people on average. The available evidence suggests that microfinance sometimes doesn't help people and sometimes does. It does not appear, on average, to transform lives, to end poverty.

  One thing I like about microcredit is that the leading institutions are substantially self-sufficient. As organizations, they are quite remarkable, employing hundreds or thousands of people at tasks most thought impossible. They operate in difficult circumstances and are relatively accountable to their clients. They are what Bill Easterly calls "searchers." They enrich the institutional fabric of their nations. So even if microcredit does not live up to the hype, if we judge it against modest, realistic expectations (which Easterly implores us to do), it may not be doing so badly.

  -- David Roodman
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