Q&A: Seeking “Real World” Solutions to Global Poverty

In discussions of how best to solve global poverty, helping the 3 billion people living on less than $2.50 per day, development economists tend to fall into one of two camps.

One camp claims that wealthy nations contribute too few dollars to combat poverty. The other camp counters that money doesn’t guarantee poverty alleviation, and points to the $2.3 trillion spent in foreign aid over the past 50 years as evidence that throwing money at the problem won’t solve it. Despite their differences, both groups agree that some types of development interventions work better than others.

Building off that common ground, Yale economist Dean Karlan and his co-author, Jacob Appel, have set out to learn what works best, and why, directly from the individuals who struggle to lift themselves and their families out of poverty. In their forthcoming book, “More Than Good Intentions: How a New Economics Is Helping to Solve Global Poverty,” Karlan and Appel canvass the globe unearthing the reasons behind successful and unsuccessful efforts to help the poor.

The endeavor is a natural fit for Karlan, as the founder and director of the non-profit research organization Innovations for Poverty Action (IPA). IPA’s mission is to work with development organizations and economists to conduct rigorous evaluations of poverty alleviation programs; it conducts projects in areas as diverse as microfinance, public health, governance and education. Before writing the book, Appel worked for IPA in Ghana, and the book benefits from both authors’ extensive time in the field.

About the images: Top: Dean Karlan (in blue) meets with farmers in Ghana with Ruth Damten from IPA, Chris Udry from Yale, and Gabriela Karlan, Dean’s daughter. Above: These goatherders in Namibia were helping IPA learn more about rangeland management. Image credit: Yale University

Karlan belongs to the school of behavioral economics, which centers on understanding deviations from rational behavior that occur among both rich and poor alike, and using such lessons to design better programs. But not all solutions come from behavioral economics, notes Karlan, noting that traditional economics still rings true in many instances, slicing through difficult situations to understand how incentives will matter for the way a program unfolds and impacts the lives of the poor. The authors bring these theories to life by relating them to problems faced by people around the world, both rich and poor.

Karlan recently received national attention when he was awarded a $7.3 million grant from the Bill & Melinda Gates Foundation for research on the development potential of micro-savings and payments systems for the world’s poor.

The Yale Daily Bulletin recently talked with the economist about his work.

To start with a most basic question: What is “microfinance”?

Broadly speaking, microfinance is the provision of financial services for the poor and people outside the reach of traditional financial institutions, like banks. Microfinance and microcredit are often considered to be synonymous, but that’s a mistake as there are many other products out there like micro-savings and micro-insurance. Early on, the microfinance industry was pretty focused on microcredit or small loans, but now there’s been a big push for micro-savings. There has always been a vocal minority pushing for increased attention to savings, but they’ve gotten a boost with the support of the Gates Foundation.

By microcredit, do you mean providing seed money to start a business?

Sometimes microcredit is used as seed money for a new entrepreneur, but often the loan is given to existing business-owners. A client might be a street vendor peddling vegetables who, before getting access to microcredit, had used moneylenders to finance her operations. Her microfinance loan allows her to borrow at a lower interest rate than what she had previously paid the moneylender. In terms of how microcredit is actually spent by clients, our research has shown a range: Some women use the loan to start or expand a business; others use it to pay back debt; and still others use it for consumption.

Microcredit has been touted as a cure for poverty. How effective is it?

Microcredit was presented for many years as a panacea in the fight against poverty, but the truth is that it was over-sold. Today, people are a bit more pragmatic and recognize that microcredit has its benefits but that it’s not the end-all. Moving forward, we’re going to have to think a little more holistically, recognizing that microfinance is broader than just loans. Sometimes people need savings, sometimes they need insurance, and we should be thinking about how we can better provide those. We should also be thinking about designing better products. Sometimes microcredit loans are rather rigid, with very inflexible repayment schedules that don’t match well with business cycles of clients, so we have to better match lending products to needs.

The recent grant to Yale and Innovations for Poverty Action from the Gates Foundation reflects this more holistic thinking and aligns with my own research interests, which are more focused on saving. I do work on credit questions too — you can’t look at one without looking at the other — but in particular I’m interested in seeing how we can take lessons from behavioral economics to improve savings products for the poor.

Is there already a well-established system of micro-savings in the areas you study?

If you look globally, you could boil down the current state of micro-savings into three categories. First there are microfinance institutions, which are NGOs that traditionally extend microcredit, trying to encourage savings. Sometimes this is done in a way that I feel is not in the best interest of the clients, because they’re trying to get people to save and borrow at the same time. Looking at this, you have to wonder why they’re asking people to borrow at a high interest rate relative to the interest they’re earning on their savings, and calling that a good thing under the umbrella of poverty alleviation. There needs to be more transparency in the communication of these costs to the clients, or perhaps products that avoid this costly behavior altogether (without sacrificing long-term savings behavior).

In the second category, you find old-fashioned banks that are interested in reaching the poor and providing access to savings. Some of this is happening through innovative delivery channels like “branchless” banking agents and mobile money. This is a nice way to reach the poor with really low transaction costs, eliminating the need for “brick and mortar” bank branches. These banking agents are often in rural areas, sometimes even accessible in a local store or market where people go to buy rice, charge their cell phones or other things of that nature. With mobile money, it’s great for making payments across the country and for storing money, so it’s starting to take off in a lot of places.

The third savings category is informal savings. We have several ongoing studies where we’re evaluating informal savings institutions in four countries — Mali, Ghana, Uganda and Malawi. In these informal savings models, an NGO works with members of a community to help them form what amounts to their own little bank. These are known generically as “savings groups,” and are comprised of 30 women who come together, put their money into a collective pot and then decide how to manage it by lending it back to themselves. They charge interest to each other but they also earn interest. In these savings groups, the members are using their own money, not some external group, to save and borrow. So it’s all a wash if they’re all borrowing the same amount. If some are borrowing more than others, they obviously end up paying more, and if they don’t borrow, they’re earning more interest. But in most of these programs people are required to borrow, so it’s really just a circle in which people use peer pressure and this collective process for gathering the money together and saving and borrowing. There’s nothing new about this. It’s just that in some parts of the world these savings groups are not as common or they’re not organized or flexible in the way they’re done.

So that’s a bit of a sketch of what micro-savings looks like right now. There’s a lot more to learn and the Gates grant to Yale will be examining research questions in both existing and new models of micro-savings provision.

It seems that there is a preponderance of women receiving microloans. Is that true or just a perception?

It’s true that microfinance in general tends to focus on women. There are a few reasons why — some of which are well documented and some of which are a little more questionable. One of the few things that most people will agree on is that money in the hands of women often does more for children than in the hands of men. Not to say that this is universally true or that it’s the same in every culture and every place, but as a general sweeping statement, that’s not a crazy one to start off with.

A lot of interventions focus on women because the goal is to try to figure out how to improve the health and education of children. Sometimes it’s based on a belief in social justice. The logic is that since women are more discriminated against — particularly in some cultures — they need more help than men to right that wrong. A more cynical hypothesis is that women are favored for fundraising purposes, because they’re much more inspiring. Maybe there’s a feeling that, in direct marketing appeals in America, talking about Juan is not going to raise as much money as talking about Maria.

As for credit specifically, people tend to believe that women are more likely to repay their loans.

Is that true?

I have never seen a setting where men are more likely to repay, but I’ve seen many settings in which they’re equally likely, and some where the women are more likely. It’s not so easy to say what’s going on here, because it’s not just a matter of gender. If I look at some data, and see that repayment rates are 90% for men and 95% for women, it doesn’t necessarily mean that there’s something about being a man that makes him less likely to repay, it might have more to do with occupation. People argue that women care more about their social reputations because they’re less mobile than men. Men can just pick up and move to a city to get a job, but women tend to be stuck in the village. They can’t just move somewhere else and restart.

How does your research intersect with the field of psychology?

Behavioral economics is in a lot of instances the application of ideas from psychology into economics. It’s the careful study of understanding the mechanism of decision-making. It’s also introducing certain biases that we have typically learned from psychology and incorporating them into economic models. There’s an old, more theoretical, lab-driven behavioral economics, but now we’re seeing a new, more applied-policy-driven behavioral economics model. We’re saying, “This is all very fine and good in terms of theories, but now let’s apply these theories to the real world and see if we can actually change behavior or does it unravel in some way.”

A common application is overeating, smoking and low savings. We’re often inconsistent in our behavior. We want to do things that we don’t do, which we later regret. So we’re trying different tests and commitment products to help people follow through with the things they really want to do, to reach their goals. Several years ago I started a company stickK.com with Ian Ayres, here from the Yale Law School, and Jordan Goldberg, a Silver Scholar student from Yale undergrad and the School of Management. This website helps people set up commitment contracts to reach their goals, and helps companies keen to improve employee well-being set up incentive programs for their staff. This is a perfect example of behavioral economics at work in the world to help people achieve personal goals.

How are you going to use the Gates Foundation grant?

Through this grant and the initiative — it’s called the Micro-savings and Payments Innovation Initiative (MPII) — Yale and our partner IPA are going to support close to 20 research projects, with most in Africa and South Asia. Overall the research generated through this initiative will look to understand the development potential of micro-savings and payment systems, and will answer questions of mutual interest to the Gates Foundation and me; in practice these projects will look at the big issues of impact of savings on welfare as well as how best to design products to increase the use of savings accounts.

One channel for getting projects started will be through a competitive grant process that will be open to other researchers to apply for funding of their savings research. We’re keen to work with researchers from the countries where we are conducting our projects, as their input in both project generation and policy outreach is vital to making this initiative a success.

What about your book “More than Good Intentions,” that’s coming out on April 14?

Good intentions are great, in fact they are necessary to inspire helping the poor. But we should not be satisfied; we need more than good intentions. We need to understand whether programs are really effective or not so that we know as donors what to support, and as practitioners what we should be doing. Rigorous evaluations help us do just that. We also must learn why programs work, rather than merely evaluate whether something works. It is the why that helps us know what lessons to take from one country to another, from one year to the next.

The book is written for a general audience. We bring in human interest stories from around the world, and use many ideas from behavioral economics to show how the challenges and issues that the poor face in developing countries are often (but obviously not always) not so different than what we face ourselves, particularly when it comes to our own struggles with our own behavior, such as resisting temptation. There are no tables. No fancy econometrics. We wrote the book so that those not getting a Ph.D. in economics can still learn what this movement to fight poverty is all about, and most importantly can learn how they can make a difference with their own charity or work.

We also want to inspire the skeptic that indeed there is a light at the end of the tunnel, there are some ideas with strong evidence behind them. They aren’t always the ideas that sound the best. But who cares how it sounds, all that really matters is that it works, and that we understand why it works, so we know it wasn’t some sort of statistical fluke and whether we should do it elsewhere too.

By Dorie Baker

*Source: Yale University

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