Sachsy development

This post appeared in Dutch on the Oikocredit Netherlands website.

The logic is irresistible: if we send enough money to developing countries, poverty will be put to an end once and for all. We have got to help, it’s our responsibility. In the book The Idealist, Nina Munk portrays the charismatic Jeffrey Sachs and his Millennium Villages in Africa. How good intentions can have destructive consequences.

Jeffrey Sachs with U2 singer Bono

Already at a young age Jeffrey Sachs (1954) stood out: he received high grades in school, won math competitions, and displayed leadership qualities. He was already a successful economist when the Bolivian president Victor Paz invited him to help Bolivia in the mid-eighties. The country was poor and the economy was in chaos. Inflation reached 25,000%. Sachs wrote a plan for economic recovery. The strict fiscal and monetary policies caused hundreds of thousands of people to lose their job or pension. But the “shock therapy” helped: inflation fell to 15%. As it turned out: the economy is controllable, as long as you are willing to make concessions.

In 1995, Sachs visited Sub-Saharan Africa for the first time. The trip marked the start of his crusade against poverty. In the decade that followed, he travelled all over the world to convince people that a “Big Push” in development aid was needed. According to Sachs, we “have to stop using the M-word and start using the B-word.” In other words, we need billions, not millions to tackle this problem. His new humanitarian image seemed to conflict with the strict policies he promoted in Bolivia. But in one respect he was consistent: as long as we display enough willpower, everything has a solution.

Sachs had reached the status of a rock star by the time he published his book The End of Poverty in 2005. U2 singer Bono called himself Sachs’s “student” and there was even a Sachs fan club. However, Sachs was not content: despite his tireless campaign, the Big Push had failed to come about. If others wouldn’t do it, he would. In 2006, Sachs convinced billionaire George Soros to finance his Millennium Village project. He would use ten African villages to show that poverty can be annihilated by investing enough money. The project was supposed to last five years, but Sachs assured Soros: “Most of the work can be done in just one year. (...) The rest is just footnotes.”   

Sachs was wrong. Munk describes how, initially, the new money improved the situation in the villages. Schools opened up, doctors were attracted by the relatively high salaries, and farmers received better seeds. But poverty is persistent. For example, the maize harvest in the Ugandan village Ruhiira doubled, but the roads were so bad that the surplus could not be traded. The extra harvest was eventually eaten by rats. Once the money influx started to slow down, the recorded improvements appeared unsustainable. Villagers were angry that their expectations had not been met. In one village, they even wrecked a car owned by the Millennium project.

Sachs denies that his project failed; he even calls it a big success. Who is right? That’s the worst: we’ll never know. There were no proper baseline measures collected before the start of the project, nor are there ‘control villages’ with which the Millennium Villages can be compared. Life seems to have improved in some villages, but Africa has been doing well in general. So, in how far can we ascribe progress, if any, to Sachs and his project?

The Idealist shows that a golden charisma, good intentions, and a brilliant mind are not sufficient for success. The main complaint of the villagers was that the project had a top-down approach and that their voices were not heard. Sachs saw the poverty puzzle as a simple calculation: add up the correct interventions and you will get prosperity as the result. But he forgot the most important piece of the puzzle: he forgot to listen to the people that the project was all about.

Want to read or listen more?

• Order the book The Idealist by Nina Munk here.
• Listen here to an interview with Nina Munk. Listen here to an interview with Jeffrey Sachs, responding to the book and, more generally, to critics of the Millennium Villages project (hat tip to Lukasz Marc for both links).

Trapped in scarcity

This post appeared in Dutch on the Oikocredit Netherlands website.

The book Scarcity by Sendhil Mullainathan and Eldar Shafir had been on my to-do list for months. I kept postponing reading it. Even though it seemed important, it wasn’t high on my list of priorities. I had deadlines: finishing a paper, preparing a presentation or... finishing my next blog post.

I wanted to read the book because it talks about the psychology of poverty. I have been fortunate enough never to have lived in poverty, and it is therefore hard for me to imagine how it must be. That’s why I travel to developing countries, do research and read books about development issues. After a busy period, I finally had time to read Scarcity last week. And? It turns out that my busy existence and a life in poverty are not as different as I thought.

Mullainathan and Shafir show that people who are poor, busy or on a diet, all deal with the same problem: scarcity. Scarcity of money, time or calories. Scarcity requires our full attention and distracts us from other important aspects of our lives: a poor mother is late for work, a busy manager forgets his daughter’s birthday, a student on a diet cannot focus on her exam.

People living with scarcity cannot think about much else. That has serious consequences: their cognitive skills suffer. A study among farmers in India shows that their IQ score is ten points higher after harvest – when there is plenty of money – than before harvest – when they are penniless. People also start behaving differently as a result of scarcity: they find it hard to resist temptations, snap at people around them and forget appointments.

I can definitely recognise these symptoms: in a busy period I sometimes forget everything around me. But I differ from a poor person in one crucial way: for me there is a way out. In the worst case I am late for a deadline or have to cancel a meeting. I can choose not to be busy, but someone who is poor is trapped.

‘Poverty traps’ have been an important topic in development economics for decades. Why can’t people escape poverty? Many explanations have been offered: poor people are not intelligent enough, live to close to the equator or live in countries with messed up political systems. Mullainathan and Shafir offer an interesting contribution to this discussion: scarcity creates a vicious circle and pulls poor people further into poverty.

As opposed to many other explanations, this explanation gives hope: poor people are not poor because of who they are, but because of their circumstances. Scarcity creates behaviour that makes poor people even poorer. A mother is fired because she cannot focus on her job, she gets a fine for being late on her electricity bill or she forgets to fill out a form that could get her child into a scholarship programme. Simple changes can make her life easier: early reminders for paying bills, insurance against financial shocks or assistance with filling out complicated forms.

What about me? What can I do to make my busy life easier? I’ll think about that later, I have a deadline to make...

Does microcredit work?

This post appeared in Dutch on the Oikocredit Netherlands website.

In 2010 I travelled across Uganda to visit microcredit projects. I met inspiring people with remarkable stories. Violet, for example, opened a primary school with the help of a loan. Microcredit seemed to be a big succession of triumphs. Nevertheless, something was gnawing away inside of me. What about borrowers that failed to use their loan successfully? And wouldn’t entrepreneurial types like Violet manage to succeed regardless, even without a microcredit? In other words: Does microcredit work?

Three students from Violet's primary school

One way to answer this question is doing a ‘randomized controlled trial’ (RCT). The concept is simple and well known from medical experiments: one group receives the treatment – a microcredit – and another group gets nothing. By comparing the two groups, you learn about the effect of the treatment. A crucial aspect of this method is the random selection of individuals. By doing this you avoid so-called ‘selection bias’. For example, imagine that microcredit clients have more entrepreneurial qualities than ‘normal’ people. It is likely that those with a microcredit will have more success, but to what extent can we assign this to the loan?

Esther Duflo and Abhijit Banerjee are the uncrowned monarchs of the ‘randomistas’, the researchers that focus on RCTs. In The miracle of microfinance?, Duflo, Banerjee and co-authors study the effect of a new microcredit program in Hyderabad, India. The results? Borrowers invest more in their business, but these investments do not lead to a decrease in poverty. Although income does not rise, money is being spent differently: microcredit clients buy less ‘temptation goods’, such as lottery tickets and cigarettes, and more durable goods, such as fridges and television sets. Other studies arrive at similar conclusions: there are positive effects, but microcredit does not seem to be the silver bullet in the heart of poverty.

But: there is not only one type of microcredit. Loans vary in size, duration and interest rate. Some loans are given to groups, others to individuals. So, instead of asking “Does microcredit work?”, we should ask “Which microcredit works?” The research on this question is ongoing, but there are already some interesting results. For instance, Lars Berge and coauthors found that microcredit works better if it’s combined with business training (link). Training does not only teach entrepreneurs how to run their business, it can also help them to find out whether their idea has potential in the first place.

After all, not everyone is a successful entrepreneur like Violet. And not everyone needs to be. As businesses grow, they create jobs for those who are less entrepreneurial. That is exactly why the Violets of this world should have access to credit, and why their loan should be designed in a way that maximises impact. With a microcredit loan in their pockets, entrepreneurs can fight against poverty in their country. 

Want to know more about RCTs?

• Poor Economics – The book by Esther Duflo and Abhijit Banerjee about RCTs in developing countries. (Amazon.com, website of the book)
• Ted talk by Esther Duflo – Esther Duflo talks about why she believes that RCTs can be used to fight poverty. (link)