The missing middle: cash transfers and microcredit

Many advocates for cash transfers and microcredit see their respective inputs addressing a capital constraint that is confining a person to lower productivity and lower quality of life (1). There is significantly better evidence for the former than the latter. At the same time, both cash transfers (capital the recipient doesn’t pay back) and microloans (capital the recipient does pay back with interest) are just points on a long continuum of options for addressing the capital constraint. Between these two poles of charity and business lies a vast expanse largely neglected (to my understanding) by NGOs, MFIs, and academics.

Case study: Assessing the cost-effectiveness of Impact Investing

The cost-effectiveness of impact investing is unclear due to both poor impact measurement and hidden costs. As I have addressed the former issue in the discussion note, “Cost-effective Impact Investments for the Impact Investor,” this note will explore the cost of impact investing, specifically the subsidy intrinsic in the investments.

Impact investments are generally a hybrid of equity and/or debt capital and subsidy, and likewise have two types of returns, financial and social. To understand the cost-effectiveness of impact investing it’s necessary to not only better quantify the social returns, but also isolate the subsidy. Only after clarifying the subsidy component of the investments can one assess the financial and social performance of the two components of the investments.

Making an impact through SMEs

The advent of impact investing is only the most recent milestone for the broad movement to ensure that private enterprise engages the poor in a meaningful way. Just as the microfinance industry has matured, small and medium enterprise development has gained momentum. Investment vehicles and business development services have multiplied as for-profits and non-profits alike try to figure out to best tap this undeserved market. At the same time, development organizations have provided technical training and assistance to move small producers up the value chain and engaged corporations to integrate small producers into their supply chains.

Development without Aid in Somaliland

In “Peace-Building without External Assistance: Lessons from Somaliland,” Nicholas Eubank explores the second-order effects of state-directed foreign aid on political and economic development. Because foreign aid has worked its way into nearly ever corner of sub-Saharan Africa, there are few controls available to estimate these effects. Eubank isolates one such control in Somaliland, which has remained untouched due to the international community’s decision to make the state ineligible for aid after its unapproved secession from Somalia in 1991.

Eubank posits that because the Somaliland government did not benefit from aid revenues, it had greater incentive to reconcile with the local commercial interests, which, in turn, had a vested interest in peace and stability that served the country well. Somaliland indeed appears to have taken major steps forward since its decimation by civil war, rebuilding cities and towns, and increasing schooling and commercial activity. A UNDP/World Bank survey finds that Somaliland has significantly higher average income than Somalia proper, a reversal of the prewar distribution, with superior health statistics as well.

Irrelevant or Robust? Evaluating Impact without Randomization

Last week I wrote about the invisible monitoring and evaluation decisions made all the time by social enterprises that determine the social impact printed in the glossy annual reports. In that post, I emphasized the importance of developing standards for evaluation design, implementation, and reporting so that managers and funders have a firm grasp on the likely impact of their work, and the likelihood that the estimated impacts are accurate. To date, much of the attention paid to study design has focused on the question of randomization, yet RCTs are simply not within reach for most social enterprises. In this post, I address the potential for rigorous non-randomized studies, focusing on the evaluation choices that dictate whether a study’s results are irrelevant or robust.

Accounting and Auditing for Social Impact

The past few years have seen the emergence of a general consensus that social initiatives that claim to improve the lives of others should measure their impact. There has been a successful (if incomplete) push for more randomization by individuals like Esther Duflo and organizations like Innovations for Poverty Action. At the same time, the impact investing community has developed a Global Impact Investment Ratings System and Impact Reporting & Investment Standards to create a common language to speak about social impact.

The Trouble with the Institution Agenda

Douglas North and company benefitted our understanding of how economies grow with a series of papers and books on the role of institutions. Institutional development can take many forms, but often involves providing large sums of money and technical assistance to governments. The donor can tout that the improved institutions will be self-sustaining (rather than creating a dependency on the developed world!) and provide greater local ownership of development. Unsurprisingly, institution building is hot.

The problem with institutional development is that we aren’t quite clear what constitutes a good institution (i.e., plenty bear the trappings, but not the horse), and we don’t know how to make them. The former question complicates the latter and the latter undermines development work. What’s more, while we don’t know how to make good institutions, the evidence we do have suggests that the strengthening of state institutions only undermines the cause. Sue Unsworth provides the broad strokes in An Upside Down View of Governance (HT: Chris Blattman):

When Does Schooling Pay?

Robert Barro and Jong-Wha Lee report:

Results confirm that the rate of return to schooling varies across levels of education. The estimated rate of return is higher at the secondary (10.0%) and tertiary (17.9%) levels than at the primary level, which differs insignificantly from zero. The results imply that, on average, the wage differential between a secondary-school and a primary-school graduate is around 77% and that between a college and a primary-school graduate is around 240%.

The challenge of increasing educational attainment is evident in the numbers: education doesn’t pay at the beginning, and if you are uncertain about the future it might make sense just to work. PROGRESA provided conditional cash transfers to families based on school attendance, changing the economic incentives and positively affecting attendance; the question is whether this increased primary school attendance, in itself, is worth much. More often than we’d like to believe, the decision not to attend school is rational.

Aid and State Development

Greater accountability in international aid means different things to different stakeholders. Formally, the principals are the donors, who focus on the social impact of their funded projects, executed by NGOs or host government agents. At the same time, donors (and all aid organizations) are acting as agents on behalf of their intended beneficiaries (“recipients”). As these recipients exist as tangible beings in space, they live within political jurisdictions, wherein other people exercise government power in their name with varying levels of responsiveness and general interest in their well-being.

Given these realities, should NGOs attempt to help their intended recipients by expanding the capacity of host governments to provide social services or instead develop independent systems of social service provision?