Esther Duflo, Phd. in Economics (MIT), talking about the impact of microcredits.

2. Have we misunderstood
microcredit?
Esther Duflo
Santiago, March 19th 2015

3. The promise
• Instead of finding a job, the poor can start their
own businesses and make a good living
• Economies draw on a larger talent pool of
entrepreneurs
• Many new products and ideas get created—
from the “bottom of the pyramid, for the bottom
of the pyramid”
• All we need is an enabling environment—more
financial inclusion in particular microcredit;
and perhaps less regulation.

4. The temptation
• As countries struggle to create enough
jobs, this is a very tempting narrative
• Easy and “win”-”win”

5. Hilary Clinton
“Microcredit is a macro idea. This is a big idea, an idea
with vast potential. Whether we are talking about a
rural area in South Asia or an inner-city in the US,
micro credit is an invaluable tool in alleviating
poverty. Microcredit projects can create a ripple effect -
not only in lifting individuals out of poverty and
moving mothers from welfare to work, but in creating
jobs, promoting businesses and building capital in
depressed areas. Microcredit (...) has positive
consequences on the entire community and creates a
fertile soil for democracy to grow because women and
men can hope in the future of the planet again.”

6. Today…
• What do we know about the businesses of
the poor?
• What have we learnt from nearly twenty
years of experience of microcredit in the
developing world?

7. Lots of entrepreneurship among
the poor
• Who is an entrepreneur?
• 12% of people in the OECD describe
themselves as self-employed
• The corresponding fraction in the rest of
the world is much higher.

8. Billions of Entrepreneurs…

9. How many households had at least
one person self employed in
agriculture?

10. How many households have at least
one person self-employed in non-
agricultural work?

11. How many poor households have at
least one non-agricultural business?

12. Why is this surprising?
Credit constraints
The pain of bearing risk
Lack of Skills
Limited Connections

13. “Natural Entrepreneurs”
• Does this mean that these people are
natural entrepreneurs?
• That much more creative and dynamic
• What do we know about the businesses of
the poor?
 Size
 Type
 Multiplicity
 Durability/dynamism
 Aspirations

14. How many paid employees do these
businesses have?

15. How many total employees do these
businesses have?

16. What percent of businesses own a
vehicle?

17. What percent of businesses own
some machines?

18. What businesses are these?
• In urban locations
 Petty retail of standard commodities
 Food preparation
 Tailoring, stitching
• In rural locations
 Livestock
• Very little diversity

19. Limited specialization

20. And they go in and out
• In Rural Andhra Pradesh, in a panel we
conducted, of 100 households who have a
business at baseline, only 32 still have one
at endline!

21. Why are these businesses so
small?
• We once calculated that some of these
business owners could double their
capital stock by not drinking tea for a
year
 Why don’t they?
• If credit is the problem then
microcredit should help
• Does it?

22. The evidence
• Is from six different countries
• The countries: Ethiopia, India, Mexico,
Mongolia, Morocco, Bosnia
• The settings: Urban and Rural
• All from randomized control trials
• Similar programs, similar evaluation
methods
• Similar outcome variables reported in
the same way.

24. What do they find?
• Key results are surprisingly consistent across
sites.
1. The majority don’t want a loan
2. Microfinance is associated with business expansion,
but mainly for existing businesses (limited new
business creation).
3. NO significant changes in household total income or
consumption
4. Usually NO significant changes in self employment
income for the average household, although some
find increase in profits for pre-existing businesses.
5. Some increases in household durables.
6. Shift away from temptation goods, celebrations

25. Detailed Evidence from
Hyderabad, India
• 31% of the households run at least one small
business (vs. OECD average of 12%)
 Of these, 9% of households run more than one business
• But these businesses had few…
 Specialized skills (mostly general stores, tailors,
fruit/vegetable vendors)
 Employees:
 Only 10% have any employees; none has more than 3
 Assets
 20% use no productive assets whatsoever.
• Scale of businesses:
 Sales: Rs 13,000 (~$325) per month
 Profits: Rs 3,040 (~$75) per month

26. Why do you want a loan?
0% 5% 10% 15% 20% 25% 30%
health shock
crisis
education
ceremony
household durable
household consumption
capital for existing business
start business
repay old loan

27. Impact on investment
12.1
5.3
0
5
10
Business durables
138
116
0
50
100
Durable PCE
* *

28. Impact on poverty
1,457 1,419
0
500
1,000
PCE

29. What is going on?
• People use microcredit primarily to finance
“lumpy” consumption
 Refrigerators, televisions, marriages
• They pay for that by taking on extra work
 Some new businesses
• Or by cutting back on other forms of
consumption
• Expanding their business is not their objective

30. Households do not value their
businesses
• Study in rural Karnataka (India).
• Infamous SKS: the organization that had the IPO
that brought them so much money that it
brought microfinance down
• The organization tried to impose an unpopular
health insurance program with a fee of R500,
rolled onto the loan:
 22 pp (nearly one third) decline in participation in the
program, not offset by joining other MFI
 Losing access to microfinance leads to a R20,000 loss in
profits for entrepreneurs: 62% of control means.
 How can people not want to pay Rs500 to avoid losing
Rs20k?

31. <5V42 7U[$4Y <6K/Y 42 7$3K<4U$EKV$UK2 U$

32. Why are they in business
• Lack of good jobs:
Almost nobody grows
therefore no one
creates good jobs
• Flexibility
• “Idle” women

33. Reluctant v/s Natural
entrepreneurs
• The results I showed for Hyderabad are the average
for the population
• Very different results for those who started their
business after getting the loan versus before
• The former substitute one set loans for another; the
latter want them all
• The former don’t buy much business durables; the
latter spend at the least value of the loan
• The former see no increases in profits; the latter see at
least 50% probably bigger increases
• More employees, greater wage bill etc. for the former;
nothing for the latter

34. Long Run impact
• We surveyed these households again after they had
lost access to microcredit due to the crisis in
Andhra Pradesh, 6 years after the initial loans
were given.
• Those with no pre-existing businesses:
 Are more likely to have a loan in original treatment slums
 Have lost social network connections
 Are no more likely to have a business or have a larger
business
• Those with pre-existing businesses
 Large impact on profits, especially at the top
• This is explain by type, rather than by maturity

35. Implications for financial
inclusion
• Does not mean that financial inclusion is not
important for the average person:
 Credit helps people all over the world acquire
durables and deal with lumpy expenditures
 No different for the poor
 But savings and insurance may be at least as
important
 Indeed credit might sometimes play the role of
savings, at a very high costs.
 We have no adequate savings products for the poor
that mimic what microcredit can do (forced deposit).
Those exists for the rich

36. Implications for the
entrepreneurial route
• Not for everyone
• 10% of the population? 5% per cent? Less? have real
gift/taste for entrepreneurial activities
 Potentially even less in OECD
• They need to grow more and create jobs for the rest
• For making this happen, conventional microcredit o
not be the best instrument
 Not selective
 Too little
 Not flexible
• We need financial innovations to go this route

37. The challenges
• How to identify the “good” entrepreneurs? The
difference we see in the research between pre-
existing and new entrepreneurs will not typically be
available…
• The social shaming/group structure will not work as
well for larger loans, when defaulting will be more
tempting. Repaying will also be harder if people do
not invest the money. How will investment and
repayment discipline be enforced?