There’s been a lot of excitement about microlending, especially since the 2006 Nobel Peace Prize created a wave of stories about it. The basic idea is to make loans to the destitute, helping them pull themselves out of poverty. The stories and the numbers floating around from fundraisers paint a picture that’s simply too good to be true (below) … we can’t authoritatively say that we have the real story, but I think I’m starting to understand the difference between these stories and how microlending actually helps people.

First, the good stuff.

The microlending you’ve heard of: beggars to billionaires, thousands of times a day
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When I first heard about microfinance, everywhere I turned was a story like this one, or this one, or perhaps this one, or all these ones. (Dang. That was the easiest time I’ve ever had finding examples of anything.) Basic story: poor entrepreneur has a killer business model (OK, usually a fruit stand) that’s ready to expand, if only someone would lend the funds. In swoops a microlender; the entrepreneur borrows, expands the business, succeeds, and changes her life for good.

Now imagine how I felt after combining those basic stories with the aggregate numbers: repayment rates like 97%, on billions of dollars lent, with a typical loan being around $50 ??? So if each loan repaid is a person who has built a business and escaped poverty … then if I donate $50, it can be lent out repeatedly and help a family escape poverty every 6-12 months for the rest of eternity? And if Grameen Bank has lent out ~$5 billion … that’s … 100 million people lifted out of poverty forever?

I know what you’re thinking: “Sign me up! How could Holden doubt any of these claims?” Well, call me the Grinch, but here were a few things that bugged me:

1. If every loan were really going to expand a successful business, the lenders wouldn’t be nonprofits – they would for-profits, and Muhammad Yunus and his friends would all be katrillionaires. Oh, and poverty wouldn’t exist.

2. Expanding a business is going to involve serious risk, unless you’ve got new customers already lined up for miles. I know I never gave much thought to being an entrepreneur until I had some cash saved up … seems hard to believe that people living hand-to-mouth are all chomping at the bit to do it. This paper makes this general argument (hard to be an entrepreneur when you’re in poverty) a bit better than I just did.

3. Seriously … how many people do you know who could start a profitable business if you loaned them a million dollars?

But then again, if these people aren’t lifting themselves out of poverty, why and how are they borrowing money and paying it back? What’s really going on here?

The microlending that happens: credit as basic need

Here’s a paper you’ll be hearing more about in future posts. It’s a review of many studies of the actual impact of microfinance on poverty. Pages 17-20 describe one of the more rigorous attempts at this, and the debate over what it showed; the one thing all three of the studies agree on is that people with credit available had smoother consumption: “household consumption increased most during the lean Aus season, when the poor often go hungry.”

I don’t know about you, but I’ve always taken my ability to smooth consumption (saving, borrowing, etc.) so much for granted that it didn’t even occur to me what it would be like to live without it. But as this paper argues in great detail, the world’s poorest often are less badly hurting for food/medicine than they are for the most basic support networks and mechanisms we use to manage our lives. If your income is seasonal and you’ve got no bank, forget about starting a business – you can’t even plan for the next week.

In this context, giving loans isn’t about creating and expanding ventures, it’s about meeting a basic need that might be as vital as the classic food, water, and shelter: the ability to manage risk and plan for changes. Loans aren’t the key to ending poverty, but they’re one of many things that we have to make available.

So I’ve done it, I’ve killed Santa Claus. Microloans won’t end global warming and baldness; they’re just one more way of helping people, along with bednets, condoms, and water purification. Donors, how do you feel? Disgusted? Disillusioned? Ready to swear off charity for good? Or interested in learning more?

Thanks to Tim of Philanthropy Action for discussing this issue with me and pointing me to two of the papers above (Dichter; Banerjee/Duflo).

See this post for the ground rules of this Face/Off.

Most of the organizations we’re covering in Africa don’t just do one thing, they do many. I want to get a picture of what the organization as a whole is trying to accomplish (my benchmark is to understand 80% of programs) and the evidence that supports the effectiveness of those programs. I can’t think of any other way to evaluate the efficacy of an organization. It sounds like Holden is worried that asking for 80% is going to be too hard on the charities we’re evaluating. Too hard to explain 80% of what you do? How could that be? If you can’t explain 80% of what you do relatively easily, then there’s just no way that your organization is running effectively. The organizations we fund have to be able to do that.

Holden’s approach, I think, relies on asking the charities what they plan to do in the future and why and relying on that to guide our grantmaking process. I just don’t put a lot of weight on what a charity tells us they’re going to do. We’re funders and they’re going to tell us what we want to hear. I don’t want to fund a charity based on who can give us the slickest presentation and who can whisper sweet nothings in my ear.

Even if I did mostly buy what the charities were telling me, I question their ability to reasonably predict their program’s success. Why is it so difficult? Really, we just need a charity to tell us what they’re planning to do, argue that it’s smart, and articulate how they plan to execute the program. But, it’s just not that simple because it’s really difficult to figure out what’s going to work. Africa has a lot of complicated, interconnected problems, and I don’t want to judge the best organization based on what I think will work. I want to see definitive results of what works, and then I want to throw money at it. I want to fund the organization that’s proven it can effect change (save lives, increase economic opportunity, etc.) despite all the obstacles. Holden would probably object here that if the problems are so complicated why do I trust any organization to decide what to do next? Well, I don’t just think that those that have proven, effective programs are more likely to make better decisions in the future (though the probably would). I want to fund organizations that are going to keep executing on their proven programs. As long as the same problems persist in Africa, I just want to keep throwing money at the organizations with proven, effective programs.

That’s the heart of my argument, but there are two more pieces of support rattling around in my head. First, I can imagine funding something new if it were necessary. But, there’s so many ways to save lives in Africa that have already been proven, that I don’t see any reason to go off and try something new. Second, I want to fund organizations for which it’s incredibly clear why we’ve chosen them. I want to fund organizations that allow anyone to read our site and agree or disagree with our judgments based on the facts. I want to take as much as possible of the subjectivity – how well a new program will likely work in the future – out of the equation.

See this post for the ground rules of this Face/Off.

When a charity does a million things in a million places, it’s futile to try to understand all of it, or even 80%. Speaking very practically, we’ll be taxing the heck out of their development officers, asking for so much information – to say nothing of what we’ll be doing to ourselves. And who cares what all their programs are, anyway? We all know that funders have a tendency to impose their priorities on others. So an org is doing an AIDS program in Kenya because some foundation made them back when AIDS was hip. What does that tell us about the organization’s approach, effectiveness, and more importantly, what they’re going to do with future funds?

Forget what an organization has done: I want to know what they will do. I want our application to ask not “Tell us about your existing programs,” but “What are your upcoming priorities? What projects come next?”

The obvious objection is that we want to find activities that are proven, effective, and scalable – not speculative ideas that have never been tried. But I think for a good organization – or at least one in line with our priorities – what comes next is what’s proven, effective, and scalable. They won’t be able to show their results for the exact program and region under discussion – but they must be able to show that similar programs have worked in similar places. And, we should demand that they justify what they’re doing as opposed to all the other things they could be doing; an organization that wants to fight malnutrition should explain why it isn’t targeting diarrhea – and vice versa.

The organization whose future plans make the most sense, have been thought through the best, and are most similar to things that have already worked is the organization I want to fund. And organizations are used to answering this question. It’s easier for us, easier for them, and more fair: judge a charity based on its future, not its past.

Elie and I have been arguing pretty heatedly, and we decided to put our argument online so you all can weigh in if you’d like. The topic is a bit dry, but absolutely essential, and a question that anyone interested in donating can answer. Here’s the question:

What should our Round Two application cover, or, how do you evaluate a mammoth charity?

Background: Our Round One app avoided this issue neatly, by asking each charity to focus on a single program of its choice. The goal was to narrow the field to the charities that are good at documenting what they do; before we ask who’s best at saving lives, for example, we need to make sure we’re dealing with charities that can give us some idea of what they did and how many lives they likely saved. But for Round Two, we can’t be so narrow: we really need to know who’s going to use our money to do as much good as possible. And when a charity has vast array of different programs in different countries (as so many Africa charities do), how can we figure out how good they are, without spending years on the app?

I want one approach; Elie wants another. Here we go – turn off that baseball game and watch the sparks fly on the GiveWell Blog, where ideas fight to the death!

Holden and I have been reviewing applications for Cause 5: help disadvantaged adults become economically self-supporting. This is what we’ve learned so far and what we’re just generally wondering about.

We initially envisioned this cause pretty broadly, but we’ve found that there are a critical mass of organizations that follow the same basic model: take disadvantaged (largely unemployed African-Americans and Latinos) people, train them in both a specific vocation and in how to get a job (e.g., resume writing and interviewing help), place them in a job, and follow up with them to track their progress and help them retain their opsition.

We want to know how much good each organization effects for the dollars that donors spend. For us, that means understanding where each individual would have been had Organization X not helped him and where he is because they helped him. Roughly, that equates to understanding:

• The population each organization serves. Although each organization follows the same basic model for improving economic opportunity, they differ on whose lives they try to improve (though all focus on low-income, largely-minorities). On one end of the spectrum, some recruit the best and the brightest, taking only 25% of applicants (who they put through a rigorous interviewing process testing their motivation) and requiring a high school diploma or the equivalent. On the other hand, some organizations attempt to help all those who walk in, trying to train homeless, unemployed, poorly educated (often those with only at fifth-grade level for reading and math) and many who have a criminal record and a history of substance abuse.
• The outcomes they achieve. We (and the organizations who’ve applied) have three ways of tracking outcomes: people who get jobs, how long they keep those jobs, and how much they make.
• The cause of the change. Understanding the population served and the outcomes achieved will allow us to better understand each organization’s effect on those it serves. For example, it seems likely an organization which selects only 25% of those who apply (and interviews particularly for motivation) and accepts only those who have graduated high school will likely have graduates with better outcomes (higher paying jobs held for longer periods of time) than those organizations which select previously homeless, poorly-educated clients. But, Organization 1 is not achieving those outcomes because it has a better program. It’s achieving better outcomes because it selects people who would likely have gotten there (or at least improved) without any help in the first place. How many of these people do you think would have been fine without any help? Or at least, with extremely minimal help – could these organizations serve a lot more people (and basically get the same results) by cutting way back on services?
• Cost. Well, last but not least, what does it cost each organization to effect that change?

Right now, we’re leaning toward passing the organizations that provided us with outcomes data (how many of their clients got jobs, and how long they stayed in them) to the next round – if an organization didn’t even tell us this (when we asked for it quite clearly in our application), evaluating their results is just going to be too much of an uphill battle. With these orgs, we’re going to get all the data we can get from them about what results they got and what population they served. Then comes the hard part: figuring out what the “benchmark” should be for that population (i.e., how they likely would have done without this help). NYC has some pretty detailed census data, so we hope we’ll be able to get at least some idea of what’s “normal” for people in different neighborhoods at different levels of education.

Well, that’s what’s on my mind. What do you think?