Two new stud­ies from MIT’s Jameel Poverty Action Lab have evi­dence that calls into doubt microcredit’s effec­tive­ness in eas­ing poverty.

The authors of the two stud­ies say that micro­cre­dit does help the profit mar­gins of micro-businesses that receives the loans, but that does not trans­late into bet­ter qual­ity of life for the bor­row­ers. The stud­ies say that the bor­row­ers do not enjoy greater health, income or more education.

Microcredit’s defend­ers say that the stud­ies have too short of time frame to prove any­thing. The stud­ies were con­ducted over a two year period. Micro­cre­dit apol­o­gists say that the true effects of the loans are over a longer period of time.

From the Boston Globe, reporter Drake Ben­nett tells us how the stud­ies were conducted.

At least one author of each of the papers is affil­i­ated with MIT’s Poverty Action Lab, a research cen­ter that brings together econ­o­mists with a deter­minedly exper­i­men­tal bent. In par­tic­u­lar, its researchers all share a belief in ran­dom­ized con­trolled tri­als — the same sort of test that new drugs have to undergo — as a tool for eval­u­at­ing poverty alle­vi­a­tion measures.

Kar­lan and his co-author, Jonathan Zin­man, an asso­ciate eco­nom­ics pro­fes­sor at Dart­mouth, looked at a bank in the Philip­pines that offered microloans. They cre­ated their con­trolled exper­i­ment by alter­ing the algo­rithm the bank used to eval­u­ate cred­it­wor­thi­ness so that some bor­der­line appli­cants were ran­domly denied loans while other oth­er­wise iden­ti­cal appli­cants had loans approved. The researchers then fol­lowed up with the bor­row­ers and non­bor­row­ers to see what dif­fer­ence the loan had made.

The answer was not much. Nei­ther house­hold income nor spend­ing rose for those who got microloans. And bor­row­ers who did put the money into their busi­nesses — instead of using it, as many did, for house­hold expenses — actu­ally shrank rather than grew their busi­nesses. Kar­lan and Zin­man sug­gest that this might be because the busi­ness own­ers were tak­ing advan­tage of the loan to fire unpro­duc­tive work­ers to whom they owed finan­cial favors, and those fir­ings seemed to explain the very small gains in profit Kar­lan and Zin­man found. In addi­tion, the gains accrued only to male entre­pre­neurs, not the women usu­ally tar­geted by micro­cre­dit programs.

The sec­ond study, co-authored by Abhi­jit Baner­jee and Esther Duflo, eco­nom­ics pro­fes­sors at MIT, along with Rachel Glen­ner­ster, exec­u­tive direc­tor of the Poverty Action Lab, and an MIT eco­nom­ics doc­toral stu­dent named Cyn­thia Kin­nan, found a slightly larger impact, though a selec­tive one. Work­ing with a micro­cre­dit bank in India that was look­ing to expand in the city of Hyder­abad, the researchers did find some small pos­i­tive effects. Bor­row­ers who already had a busi­ness did see some increase in profit. House­holds with­out busi­nesses that the researchers judged more pre­dis­posed to start one were found to cut back on spend­ing, sug­gest­ing they were sav­ing to aug­ment their loan for a cap­i­tal busi­ness expense like a push­cart or a sewing machine. The researchers also found small but encour­ag­ing shifts in house­hold spend­ing across the board, with less money spent on “temp­ta­tion goods” like alco­hol, tobacco, and gambling.

Still, over­all house­hold spend­ing — a key indi­ca­tor of finan­cial well-being — stayed about the same. And the researchers found no effect on children’s health or edu­ca­tion lev­els, and the women in the bor­rower homes were no more likely to play a role in house­hold deci­sions than those in the con­trol group.

To Duflo, this only seems dis­ap­point­ing because expec­ta­tions for micro­cre­dit are so high.

“I don’t see this as a neg­a­tive find­ing,” she says. When asked why she thinks micro­cre­dit didn’t boost health and edu­ca­tion out­comes, she says, “I would really ask the ques­tion, ‘Why did we expect all these things to hap­pen?’ If you give peo­ple access to a finan­cial instru­ment, it’s like any other instru­ment. It’s use­ful, but it’s not like the mir­a­cle drug to end poverty.”

We take the side of micro­cre­dit in this debate. Micro­cre­dit can help the peo­ple who receive the loans and it’s effects only will accu­mu­late for the next gen­er­a­tion and the next. The loan reciepi­ent will be able to make enough mar­gin from their micro-business to keep their chil­dren in school. The chil­dren will in turn receive a bet­ter edu­ca­tion and will be able to earn more money.

Besides, the con­tin­ued growth of micro­cre­dit through the global reces­sion is proof enough.

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