The Hazards of Results-based Aid

Andrew Mitchell’s column published in the Times on Thursday is perfectly in line with his party’s green paper on international aid, the Conservative Agenda for International Development. In particular, the Conservative Shadow Secretary of State for International Development puts a strong emphasis on the necessity of strict evaluation and assessment of aid’s outcomes, in order to “move towards results-based aid”, which in the end would mean to “reduce, or even abolish, funding for UN and multilateral agencies that fail to deliver results”.

This “unashamedly pro-business approach to development” – in the words of Mitchell himself – gives microfinance a central role among development tools. Indeed microfinance seems by definition to appeal to the Tories, since it is based on self-help rather than on a hand-out, and as a system is destined to become self-sustainable as well.

It seems hard to disagree with this stance. The fiercest supporters of aid to developing countries would undoubtedly concur in striving to implement the most efficient programmes possible.

Nevertheless some very basic hurdles may appear in the way to this “rational” framework. One of them is that it can be argued that the efficiency of microfinance has yet to be clearly proved.

This could come as a surprise to many. Indeed microfinance has become “the rock star of international development”, as the Boston Globe puts it in a September article and might simply be the most visible and praised innovation in anti-poverty policy within the last half century.  The number of microcredit clients has reached 155 million, which ultimately means some 550 million individuals benefiting from these services. Microfinance, and specifically microcredit, its emblematic spearhead, is widely deemed as durably moving people out of poverty, empowering individuals and noticeably women, and ultimately triggering economic growth as well as improved health and education levels.

The first reason for a recent backlash that was sparked off a few months ago by two research papers is quite obvious: Such great expectations were always going to be difficult to satisfy.

These two impact studies, conducted by leading development economists, appear to some critics as more thorough and reliable than other studies implemented so far – among other reasons because they’ve used randomized evaluation methods (which enable to establish a credible comparison between two groups, with only one of them having benefited from the assessed programme), while previous optimistic studies’ methods and subsequent findings have been called into question.

In short, “The miracle of microfinance? Evidence from a randomized evaluation” (Banerjee, Duflo, Glennerster and Kinnan), and “Expanding Microentreprise Credit Access: Using Randomized Supply Decisions to Estimate the Impacts in Manila” (Karlan, Dean and Zinman), show that microfinance does not offer a way out of poverty. It does give a boost to a few of the most entrepreneurial individuals to start up a business but doesn’t directly translate into positive outcomes for the clients, as measured by indicators such as income, health, education or women’s empowerment.

This verdict may seem harsh and disheartening to many hopeful supporters and observers worldwide.

But noticeably the authors of the study on India themselves are not that disappointed. Microcredit may not transform lives, they argue, but it ameliorates them, enabling the poor to access a reliable source of credit. These available loans allow the poor to smooth their consumption levels and to face unexpected emergency spending.

Indeed what we, as relatively wealthy individuals may not realise is the way the poor not only have to deal with the limited amount of their resources, say a few dollars a day, but also with the fact that this amount is only available on an extremely unreliable basis. Smoothing their income may not seem like a spectacular achievement to us but it means invaluable living standards improvement to them.

The fact remains that this is the kind of improvement that is less clearly assessable than a sharp increase in income.

Susan Johnson, a professor at the Centre for Development Studies in Bath, mentions the inherent risks in a strong focus on the need for clear assessment in her article “Microfinance is dead! Long live Microfinance” which she presented last month at Greenwich University.

She argues that already, microfinance as a poverty alleviation tool has passed away. One of the reasons resides in the fact that microfinance’s expected outcomes haven’t been clearly and globally proved.  As a result, policy-makers have estimated that microfinance practitioners and supporters had failed to make an ongoing and sustained public policy case and that  subsidies could not be justified anymore . “In this sense “mission drift” is now complete at the policy level and microfinance is dead!”

But according to Johnson, “The miracle of microfinance?” and “Expanding Microentreprise Credit Access” merely show the “complexity and the heterogeneity of impact pathways and outcomes” of microfinance, rather than its definite failure.

Microfinance, like most development tools (and like most economic tools could we say) takes time. Probably more time than the 18 months allocated to these research studies. And like other tools it can’t be used and subsequently assessed on its own. In order to bring about some significant and long-lasting impact on individuals and communities microfinance services should be delivered alongside other services relating to education, training, capacity building, etc. But research led on the impact of microfinance has not so far considered these synergies.

Development in general and poverty alleviation in particular are extremely complex processes. In her presentation at Greenwich University, Johnson warned of the fact that focussing on striving to demonstrate outcomes might divert from the heart of the matter: studying the dynamics of processes. There will always remain a certain degree of elusiveness in attributing inputs to specific outputs, not to mention specific outcomes.  Many factors are correlated with poverty; these impediments might impair the success of microfinance initiatives in raising incomes and come in the way of assessment’s findings. As a result, the current state of evaluations so far is basically that access to capital is powerful for some, useful to many, but does not benefit all.

Similarly, the notion of empowerment, which has been given so much prominence in relation to microfinance, appears as a tricky one in terms of assessment according to Johnson.

While ‘empowerment’ has proved a useful term for practitioners on the ground involved with promoting women’s engagement, in a more analytical mode it presents problems as it is so difficult to pin down. This is not income or business growth, it is multi-dimensional, born of social norms as well as deep social structures, and meaningful indicators must differ by social context and even between women themselves. To be able to borrow funds for a small business may produce a sense of empowerment in one of many aspects of a woman’s life while thrusting her into male dominated markets, opening her to physical risks and hazards, and potentially provoking problematic intrahousehold reactions on the other. Who then is to judge whether this constitutes empowerment, and over what time period?

Additionally, if this whole debate relates mostly to microcredit, the crucial importance for the poor of other financial services such as microsavings and microinsurance should be emphasised (click here to read a former post on microinsurance). The improvements they bring to poor people’s lives are also not particularly dazzling compared to the idealistic narrative of a small entrepreneur lifting himself out of poverty, but they mean dramatic changes on a daily basis as well as in the long run.

Improved living standards also build up on the relief and empowerment stemming from feeling better protected against very different kinds of potential risks. And this state is not to be easily measured in terms of return on investment of every penny spent on a given development programme.

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2 responses to “The Hazards of Results-based Aid

  1. Output-Based Aid (OBA) is another results-based approach to aid that may be of interest to the Results UK community. The World Bank will publish a book in March 2010, Output-Based Aid: Lessons Learned and Best Practices, which provides a practical review of the use of OBA to increase aid effectiveness. More information on OBA is available on the Global Partnership on Output Based Aid (GPOBA) website: http://www.gpoba.org/gpoba/what-is-oba. DFID is one of six members of the partnership.

  2. You’re right. Microfinance is a slow yet promising process. I read a similar post at the Kiva Fellows blog a few weeks ago. As part of their training, they are cautioned they will see no dramatic, heart-warming stories. Instead, they are taught to look deeper and appreciate small positive changes in the lives of borrowers.

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