Thanks,
Pablo from Argentina

Thanks for the post, very thought provoking!

I look at consumption smoothing and investment as separate entirely. Investing is obviously straight forward, loans for education or a business, the criteria being that it provides a return. Defining consumption smoothing is perhaps less obvious. Ask yourself this: am I taking out a loan to buy something with money I’ll make in the future (not money from what I put the loan to)? Buying a car is an example where you do this with a traditional loan. Your car is only going to lose value, there’s no return on the investment, but since you know you have future income to pay for it, you buy it now. Credit cards are the same thing, us for smaller purchases and at higher interest rates. So the distinction is less credit cards vs. micro loans (bc a credit card is just a tiny loan) but loans for consumption vs. investment (which is I think what you’re getting at when you ask if a microloan is the same as a credit card).

And then I think that pathway out of poverty – which I assume means ‘does this alleviate poverty?’ is a separate question. Or it should be, and people aren’t making it one. Why? Because when we talk about poverty all too often we focus on income growth and not the well being implications that it’s only a proxy for.

What I’m getting at is this: too often the debate focuses on whether the loans are used for consumption vs. investment. Consumption is bad, investment is good, because investment leads in income growth, “the path out of poverty,” But I would argue that if a microfinance loan is used for consumption smoothing, this still has an important impact on well being that improves the lives of the poor. If I can take out a microfinance loan to smooth consumption because of an income shock which enables me to not take my kid out of school, or send my sick sister to the doctor, or not go hungry — my future income may remain unchanged but I’m able to borrow against it to get through tough times. If my consumption shifts due to microfinance (which is what the most recent random eval studies showed) away from alcohol and tobacco and more towards things that matter for well being, then people are better off, even if long run income levels are unchanged.

Underlying all of this is a reminder to focus on not the income growth itself, but what it is you’re trying to proxy by measuring it. Credit for both consumption smoothing and investment improve the lives of the poor, if you ask me.

Thought provoking as always. In fact I think my next blog posting is about to pour out :). I think I would state this one a bit differently: “Traditional” loans are usually aimed at smoothing consumption around the type of significant investments that provide positive, and lasting, long-term shocks to income levels.”

I look at consumption smoothing and investment as separate entirely. Investing is obviously straight forward, loans for education or a business, the criteria being that it provides a return. Defining consumption smoothing is perhaps less obvious. Ask yourself this: am I taking out a loan to buy something with money I’ll make in the future (not money from what I put the loan to)? Buying a car is an example where you do this with a traditional loan. Your car is only going to lose value, there’s no return on the investment, but since you know you have future income to pay for it, you buy it now. Credit cards are the same thing, us for smaller purchases and at higher interest rates. So the distinction is less credit cards vs. micro loans (bc a credit card is just a tiny loan) but loans for consumption vs. investment (which is I think what you’re getting at when you ask if a microloan is the same as a credit card).

And then I think that pathway out of poverty – which I assume means ‘does this alleviate poverty?’ is a separate question. Or it should be, and people aren’t making it one. Why? Because when we talk about poverty all too often we focus on income growth and not the well being implications that it’s only a proxy for.

What I’m getting at is this: too often the debate focuses on whether the loans are used for consumption vs. investment. Consumption is bad, investment is good, because investment leads in income growth, “the path out of poverty,” But I would argue that if a microfinance loan is used for consumption smoothing, this still has an important impact on well being that improves the lives of the poor. If I can take out a microfinance loan to smooth consumption because of an income shock which enables me to not take my kid out of school, or send my sick sister to the doctor, or not go hungry — my future income may remain unchanged but I’m able to borrow against it to get through tough times. If my consumption shifts due to microfinance (which is what the most recent random eval studies showed) away from alcohol and tobacco and more towards things that matter for well being, then people are better off, even if long run income levels are unchanged.

Underlying all of this is a reminder to focus on not the income growth itself, but what it is you’re trying to proxy by measuring it. Credit for both consumption smoothing and investment improve the lives of the poor, if you ask me.