The indictment is in, but what about that verdict?

Last month I wrote about the underwhelming results of a randomized control trial of microcredit in India. The long and short of it: access to credit helped increase business investment, but didn't have any noticeable effect on the things we really care about, like health and education. While it would perhaps be unfair to say that the study was a final verdict on microfinance, it was clearly a serious indictment.

Now David Roodman, a researcher at the Center for Global Development, points me to even more worrisome findings. In a recent working paper, Roodman and his coauthor Jonathan Morduch find that the results of what he describes as the leading study of microfinance are highly questionable. The original study consisted of three successive surveys of 1,800 households in Bangladesh, and attributed increased consumption in these households to microcredit. (The original study relied on regression analysis, not the randomized trials that are now seen as the gold standard of evaluation.) Roodman and Morduch re-ran the data and found that it doesn't support the claim that access to microcredit increased consumption in these households. 

What to make of all this? Roodman sums up his final take-away on his blog:

I am not saying that microcredit, much less microfinance as a whole, is bad for poor people. For me, the take-home lesson is that social scientists and promoters of social programs respond to incentives to overestimate and exaggerate the power of mathematics to enlighten us about causality in social systems. Math does not substitute for wiser reflections on the nature of development and how financial services can contribute to it.

And here's my own take: Let's not despair too much about the absence of evidence that microfinance has been effective in dealing with poverty. We should be clear up front that these studies are focused on microcredit, rather than microfinance as a whole (which includes possibilities for many types of savings and insurance schemes). Roodman's coauthor, Jonathan Morduch, is also the author of a recent book called Portfolios of the Poor that relies on financial diaries to construct a comprehensive picture of the financial lives of the poor. The bottom line is that the poor already have complex financial lives, necessitated by the irregularity and unpredictability of their income.