Foreign Aid for a Frugal Age

Mmw_povertyaction_0311 John Mecklin in Miller-McCune:

[Dean Karlan and Jacob Appel's] More Than Good Intentions builds off the behavioral economics ideas widely publicized in Nudge, the Richard Thaler/Cass Sunstein book that explains how people can be encouraged to make better decisions by a society that makes good decisions easier to reach than bad ones. (Prototypical example: Students eat more fresh fruit and vegetable sticks when they are put in an appealing display next to the cafeteria cash register.) But Karlan’s book combines a keen sense of the quirks of behavioral economics with an insistence on the rigorous scientific testing of international development programs, using random, controlled trials to see whether the programs improve people’s lives.

The first sections of the book are fascinating, if less cheerful than the rest, as they take the shine off a category of aid that has been a darling of the development sector: micro-credit. In 2006, the Nobel Peace Prize went to Bangladeshi economist Muhammad Yunus and the Grameen Bank, which Yunus created, for their work over three decades to, as the Norwegian Nobel Committee put it, “create economic and social development from below.”

“Lasting peace cannot be achieved,” the committee opined, “unless large population groups find ways in which to break out of poverty. Micro-credit is one such means.”

Micro-credit programs — which offer small-scale loans to people (often women) in developing countries who then start or expand small-scale businesses — have spread to reach some 155 million people. More Than Good Intentions does not conclude that the micro-credit movement is a failure, but through a series of studies Karlan does show that, as he put it in a recent phone conversation with me, micro-credit “is the poster child for programs that are oversold.” In random, controlled trials aimed at testing the efficacy of several micro-lending programs, he finds that there are, indeed, amazing success stories, people who have taken small loans and, through entrepreneurial skill and hard work, lifted themselves out of poverty. But the studies show that this result isn’t the most common, that — as anyone with much experience in the for-profit world might guess — a poor population in a developing nation with a rudimentary educational system is unlikely to contain a far higher percentage of brilliant entrepreneurs than the general population of a richer, better-educated country.

But More Than Good Intentions doesn’t debunk international development mythology just for the sake of debunking. It tries, instead, to find a middle way between continuing to invest billions of dollars in aid programs with long, sad histories of accomplishing little and giving up on development aid as inherently ineffective.