Lying about Borrowing

Dean Karlan & Jonathan Zinman have quantified something most researchers probably sensed already – that respondents are often very sensitive to social perceptions around “undesirable” activities such as borrowing.  In South Africa, they found that roughly 47% of known borrowers at a microcredit bank told surveyors they had not borrowed, with women being more likely to lie than men, and especially more likely to lie to male surveyors than female.  (The surveyors had no connection with the bank, and thus no independent knowledge of the correct answer for a given respondent.)

This is the eternal question at the heart of research – what do you do if self-reported data isn’t accurate, but it is all you have?  And how does one incentivize truth-telling?  An interesting corollary to this experiment would have been to tell a subset of respondents that the surveyors knew they belonged to the bank (without giving the surveyors any other personal information about respondents’ accounts), and measure how the mere mention of the lending institution changed respondents’ rate of truthful reporting.  How would this work in situations where there is legitimately no authority with credible information on respondents, like measuring landholding in situations where land tenure is totally informal?  Would this be too destructive to surveyor impartiality (and general research ethics) to be an option?  The more I delve into these complicated questions of survey design, the more I find them strangely fascinating.

Eight books on development for the interested generalist

A friend recently asked me for a list of interesting books on development, and I thought I’d share the results here.  I read almost randomly in the field when I was still trying to narrow my initial broad interest in development down into something of which a career could be made, and the books below generally struck me as the most interesting, accessible, and generally well-supported introductions to their respective subject areas that I came across.  (I haven’t read some of these in years, but in retrospect I think they’d all stand up decently to a reader with greater existing knowledge of development.)  In roughly descending order of intellectual impact upon me:

  1. Development as Freedom, by Amartya Sen, is one of the best books I’ve read on the general concept of “development.”  It addresses a number of common critiques, and creates a strong philosophical framework to support the argument that “development” is still necessary.
  2. Portfolios of the Poor is my favorite book of 2009 – an incredibly thoroughly-researched look into what poor people do with their money and how microfinance plays into this.  I don’t remember learning more from a single book, well, probably ever.
  3. Understanding Poverty is a great introduction to a huge range of issues in development, from food security to education to microfinance.  It’s written by a group of leading development economists, often from a behavioral perspective, and the thought contained here is both wide-ranging and rigorous.
  4. This is a bit quirky compared to the other recommendations, but I very much liked Expectations of Modernity, an ethnography of Zambian copper miners in the ’70s and ’80s.  The description probably sounds boring, but it’s actually a great critique of the idea that people from low income countries who act in “Western” styles are blindly mimicking the West, instead of consciously bringing elements of Western culture into their lives in ways that reflect their own social & economic interests.  It basically lays out a strong case for relativistic understandings of culture, which I find hugely important for any development worker, without framing it with that potentially off-putting phrase.
  5. The Bottom Billion has held up better in retrospect than its two better-known contemporaries, The End of Poverty and The White Man’s Burden, at least in my recollection.  In a foreshadowing of my current interests, I liked its focus on research methodology in macroeconomics (i.e. where all that data underlying cross-country regressions comes from), and its quantitative look at the connections between war, governance and poverty.  (Edit: David Roodman points out his own and Easterly‘s critiques of Collier for data mining in Wars, Guns and Votes, and believes that they’re applicable to The Bottom Billion as well.  I’d suggest enjoying the intellectual curiosity of Collier’s research, but taking his statistical results with a grain of salt.)
  6. I can’t offer too much on the subject of public health, but I did greatly enjoy The Wisdom of Whores, which is an engaging book about health systems responses to HIV from the ’80s onwards, told by an irreverent epidemiologist with whom I would very much like to have a drink one day.  It’s also a great critical look at where public health data comes from, how it’s used, and to some degree why governments and international organizations choose the health priorities that they do.
  7. Making Globalization Work is something I recalled as insightful on the topics of global financial institutions, markets and trade at the time I read it.
  8. I’ve been trying to find a good overview of the World Bank that I read for a geography class a few years ago, and while I’m not sure that I’ve identified it, The World Bank: From Reconstruction to Development to Equity looks like it covers similar subject matter. I found tracing the Bank’s historical evolution quite interesting, as it also captures the variety of Western thought on “development” that’s occurred over the past 50 years, and explains quite a lot as well about current bilateral and multilateral aid regimes.

Tell me, dear readers, what else would you recommend for the interested lay reader?

The importance of trust

I promised Asif Dowla some time ago that I would blog about some of his work, and after digging myself out from a fair deal of work that accumulated whilst I was focusing on grad school applications, I finally read his interesting 2005 article on how Grameen Bank built social capital among its members. Dowla identifies three components of social capital – trust, norms, and social networks – and what primarily fascinated me from an institutional perspective was how the norms & networks of rural Bangladesh played into Grameen’s search to build vertical trust between bank & clients.  Women’s access to finance seems to be a less contentious issue in Bangladeshi microfinance today, given the country’s relatively high penetration of microfinancial services, but at the outset Grameen had to work carefully around purdah norms and women’s correspondingly limited social networks in order to convince potential clients that it was a serious partner.  As religious restrictions on gender and public space are less pronounced in most of Africa, I had previously thought of trust-building as more a matter of demonstrating reliability and transparency of services, as Portfolios of the Poor observes.  It’s interesting to see the creation of institutional trust explicitly embedded in a local context like this.  (On a related note, I was surprised to learn that Bangladesh has more microfinance borrowers than all of Africa and Latin America combined.  They’ve come a long way.)

Naturally, all of this put me in mind of Tim Harford’s hugely insightful article on the importance of institutional trust for economic growth.   Dowla has a good section on how building non-kin-group networks through group lending was an important effect of Grameen’s work in the Bangladeshi context, but he also hints at the limits of building a financial system on personal trust when he observes that joint liability within groups seemed to be enforced more by staff than by other group members.  This makes sense on the face of it, when one thinks about the conflicting incentives any group member might have to force another member to cover a missed loan payment.  On the one hand, predicating continued access to credit on full and timely group repayment is a powerful incentive to force payment, but on the other hand, clients might want to be given some leeway themselves if they miss a payment in the future – or might not want to act as hostile enforcers towards people they’ll continue to see around the neighborhood.  This is mere speculation, of course, but it does point to the advantages of shifting loan enforcement duties from a situation governed by personal trust to one governed by institutional trust.  I think it would be a good sign if Grameen’s groups had naturally drifted towards this arrangement.

Finally, my favorite phrase?  The poorest of the poor often have “a short radius of trust … because trust [must be] enforceable by the threat of retaliation.”

Psychology & economics

I have to say that I really enjoy academic literature reviews – so many insights in so little space!  An excellent recent find was Stefano DellaVigna’s “Psychology and Economics: Evidence from the Field,” which is more or less a short treatise on how to think about and test hypotheses in behavioral economics.  Whilst some of the points covered were essentially quantifications of easily observable phenomena (such as hyperbolic discounting), there were two that struck me in their phrasing and their implications for microfinance:

  • Attention is a scarce resource. This makes intuitive sense, but I found it a pithy description of a fact that we too often neglect when trying to communicate with others.  Another good insight was that “consumer inattention to non-transparent [costs] is substantial.”  This to say that we tend to anchor our purchasing behavior on the costs that are most prominent, or even literally visible to us.  For instance, most US shoppers do fully understand that sales & excise taxes will be added on to the final cost of their grocery purchases – but researchers found that listing the (unchanged) tax visibly on an item’s price tag decreased consumer uptake of that item.
  • Choice avoidance is real. I’ll just quote: “Marianne Bertrand et al. (forthcoming) examine the impact of a small or large menu set in the context of an experiment on the mailing of 50,000 loan offers in South Africa. The authors randomize, among other things, the format of the table illustrating the use of the loan. The small-table format lists only one loan size as an example, while the big-table format presents four different loan sizes. The finding is consistent with the choice avoidance results. The take-up in the small-table format is .6 percentage points larger compared to a baseline of 8 percentage points, an effect size equivalent to a reduction of the (monthly) interest rate by 2.3 percentage points.”

Both of these points made me think about striking a balance in microfinance marketing.  On the one hand, it’s clearly preferable to phrase information in ways that are transparent (no invisible costs) and understandable to clients (so probably discussing interest as a fee rather than an annualized percentage).  On the other hand, however, it’s also important not to overwhelm potential clients with information – especially those for whom microfinance is a first, and likely intimidating, foray into the formal financial system.  So the responsible MFI must figure out – what aspects of their products are clients really paying attention to?  And how do you tell people about them in a way that’s transparent, but also compelling?

I think there’s an obscure parallel here to David Roodman’s recent post on microfinance as institution building – namely, that doing better sales, marketing, client outreach, whatever you’d like to call it is a step towards building commercially viable financial systems for the average residents of developing countries.  A large part of this is that product design is at the heart of marketing, and, as Portfolios of the Poor amply demonstrated, microlending could use a revolution or ten in the design of its products.  But I also partly feel like an attention to marketing – to why microfinance clients take or refuse the loans that they do – would indicate that the financial sector is starting to take the poor seriously as financial decision-makers, as valid and valued clients of a non-exclusionary financial system.  That’s what I’d really like to see.

Banks & microbanks

Just came across a fascinating study by Jonathan Morduch & co-authors, who find that an increased presence of formal banks in a given economy pushes “commercially-oriented” (for-profit) microbanks towards serving a poorer segment of clients.   I find this simultaneously intuitive and counter-intuitive: intuitive that competition pushes banks to expand their target market, but rather surprising that the expansion of large banks (who are generally seen as bystanders in discussions of financial access for the poor) may increase access to financial services in the end.  Interestingly, the authors believe this to be one of the first studies of competition between microbanks & formal banks, pointing to a fantastic avenue for research as the microfinance sector continues to grow & formalize.

Also, my favorite phrase from this paper?  “Informationally challenged borrowers,” i.e. those who lack the appropriate documentation (ID, land titles, etc.) to obtain a formal bank loan.

Microfinance in the short & long term

It’s been a matter of some curiosity to me that the debate over for-profit vs. non-profit microfinance has remained quite vociferous over the past few months, even whilst more balanced views of the social role played by microloans have been gaining acceptance. It’s clear that a good deal of the heat generated by this particular debate is attributable to the inclusion of market-based anything – as Amanda recently wrote, “people conflate ‘market’ with ‘unfair and exploitative’ all the time,” which is obviously a sensitive issue when one is talking about banking with the poor.  But then, MFIs by their very nature – even non-profit ones – are committed to helping clients participate in business and markets. A purely market-based critique falls a bit short of explaining all the differences between the two sides.

I was thinking about this when I read Matt’s recent post on arbitrary deadlines in development.  The most insightful observation was that it’s “highly likely that the types of policies we should implement when thinking about poverty for the next 100 years differ significantly from those we would use when thinking about poverty for the next 20, or 5 years.”  And this, I think, goes straight to the heart of the microfinance debate: there is often a temporal mismatch between the effective goals of for-profit MFIs and non-profit MFIs.  For-profit MFIs, whose clients appear to be on average less poor than those of non-profits, fit into an economic space where real growth at least seems possible over the long run.  Non-profit MFIs, on the other hand, are often better suited to meet the immediate consumption-smoothing needs of poorer clients, rather than long-term investment needs.  The goal that one prioritizes probably indicates where one stands on the for- vs. non- debate as well.

This temporal perspective also goes a long way towards explaining certain criticisms that each side has launched at the other.  For instance, among the various non-profit complaints about the Compartamos IPO is the valid criticism that poor clients who are left behind by a privatizing MFI may not have access to another financial institution.  The subtext is, is short-term harm to poor people worth longer-term growth for their descendants?  Conversely, one also finds criticisms of non-profits for funding small businesses that fail to generate jobs or economic growth – an interesting moralizing critique of MFIs that use their capital inefficiently, and perhaps help fewer people than they ultimately could in the long run.

I am, of course, generalizing to some degree about the characteristics of for-profit and non-profit MFIs.  This is based on my current understanding of the debate, but I wouldn’t wish anyone to accept this uncritically, as I’m sure there’s a non-negligible number of MFIs out there for whom these descriptions would be wrong.  (I’ll even point to the first one myself – FINCA-DRC is a for-profit institution that’s quite committed to small group lending with women, which is a short-term consumption-smoothing tool if ever there were one.)  But the larger take-away here is that we as practitioners need to look more closely at the temporality of economic growth and poverty reduction, and discuss our allocation of resources between the short and long terms more explicitly.  I’m guessing there’s a place for both types of MFI in most, if possibly not all, markets.

On microloans & credit cards

Patriotic plastic chair (“Let’s Reconstruct the Congo!”)

Ah, I have so much to write about after 2.5 months with FINCA in the DRC, and so little free time in which to do it!  But one comment that I’ve been turning over in my mind for some time now is something my father said to me when I was explaining the concept of group microlending to him.  I pointed out that most clients don’t borrow for discrete events, like buying a car or paying for college, but rather take out multiple sequential small loans to finance everything from business activities to children’s educations.  (Granted, many microfinance clients aren’t supposed to be using loans for consumption purposes, but even the social pressure of group lending can’t always prevent this.) My father’s response was that this type of lending sounded much more analogous to owning a credit card than taking out a “traditional” Western loan.  And I’ve been increasingly fascinated with this idea as its implications have sunk in.

Consider the long-dominant narrative of microloans as a pathway out of poverty, now coming up against a more nuanced narrative of microloans as consumption smoothing tools whose efficacy in moving borrowers out of poverty is also dependent on the individual borrower.  (See the end of this post for more on individual variation.)   I don’t actually find these positions contradictory, just varying in their levels of nuance, but for those who do find them mutually exclusive, I think the credit-card-vs.-traditional-loan idea may resolve many of the apparent contradictions here.  “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.   Borrowing to finance a university education is a good example of this.  Credit card companies, on the other hand, make few claims about their beneficial effects on one’s long-term financial health – and are better served overall when a portion of their customers spend themselves into debt and pay hefty fees for the privilege.   The whole point is to smooth consumption of inexpensive-to-midrange products & services, and few people consider them a substitute for a larger “traditional” loan unless they’ve no other choice.  (Have you discussed putting a $180,000 undergraduate education on a credit card with your friendly local admissions officer? [Hello, Dartmouth, you expensive old dear.] I didn’t think so.)

In short, the “pathway out of poverty” narrative expects microloans to function similarly to “traditional” Western loans, and play a significant investment and capacity-building function on a personal level.  The consumption smoothing narrative, on the other hand, is redefining microloans as something closer to cash-only versions of credit cards.  (Without so many options for punitive fees for defaulters, and with a greater risk of an angry group of Congolese women coming to your house at 6 am to repossess all your plastic chairs as punishment for a missed payment.)  There are a thousand interesting directions one could go with this thought, but what I think it mostly points to is the fact that the formal economic structures of microfinance are still going through a dramatic period of evolution.  There aren’t many Western banks that wake up wondering if their primary product is a mortgage loan or perhaps really a credit card, after all.  And that leads into implications for product design, and the unbanked’s perceptions of and interactions with formal banking institutions, and on and on into what I’m sure will be many future blog posts.