Monday, October 05, 2009

Microfinance Bleg

I've agreed to participate on a panel discussing microfinance. The panel will convene in about a month, and my role is to give "the economics perspective" on microfinance. I think this means to describe theory, intuition, and existing evidence on the subject to the general public. Any recommendations on what I should read before hand?

My priors on microfinance:
  • Its availability has probably made targeted populations better off, and is probably doing no harm otherwise, on average.
  • It is probably difficult to attract financial capital to many of the areas targeted by microfinance nonprofit organizations, so there probably is not much crowding out of private investment.
  • There is probably some desirable crowding out to the extent microfinance is a substitute for other forms of foreign aid we know are less effective.
  • The returns to microfinance probably would not outweigh other reforms like trade liberalization, particularly in agriculture and immigration.

As a further question, in what ways is microfinance substantively different from payday lenders in the United States? Payday lending functionally seems to serve as high interest small loans to people with low incomes and poor/no credit history. Note that I see this as a favorable comparison to both microfinance and payday lenders. Empirical work on payday lenders is probably better than that of microfinance, so I would like it if I could make a plausible case for external validity.

There we go, I would appreciate it if you helped me update my prior with thoughts, counterpoints, and suggested readings.


Art Carden said...

My understanding is that microfinance is "less bad" than a lot of other types of foreign aid. I think its political popularity stems in part from the fact that it combines market principles with the do-something-ism that flatters the conceit of the man of system. Jeff Tucker has a couple of good critiques on, and Lant Pritchett's "Let Their People Come" compares microfinance to open borders and shows that a lifetime of microfinance increases incomes about as much as eight weeks of working in the US.

Justin M Ross said...

8 weeks! That is a great comparison, I'll look into those readings. Thanks!