Whilst conventional wisdom has it that microfinance helps the poor, one of the world’s leading practitioners of this form of finance, Shameran Abed, the director of BRAC in Bangladesh, saw 30 years ago that “it was becoming clear that microloans weren’t reaching the poorest households. Nobody wanted to lend to them because who knew if they could pay back the loan? And the poorest households often didn’t want to borrow because they weren’t confident that they could figure out how to turn a profit and repay.
Like many other charities, BRAC had also been distributing food to very vulnerable households. But Abed grew disenchanted with the model of simply giving away food, or even giving away money via cash transfers…
To put it in terms of a classic slogan: You’re giving them a fish, but you’re not teaching them how to fish.”
So what to do? How can the poorest of the poor i.e. the ultra-poor be helped? Years of research helped Abed figure out a plan: “…they realized was that the ultra-poor aren’t only poor in terms of cash — they also lack knowledge about how to invest cash, lack confidence in themselves, and lack social ties to the broader community.
“We started realizing that it’s not going to be a simple sort of solution,” Abed said. “It’s going to have to be a package of things, because it has to address multiple vulnerabilities. So then there was this idea of a ‘big push’ investment.”
That “big push” is the idea that offering a combo of assets and training and cash — instead of just, say, cash — can trigger a virtuous cycle that ultimately helps ultra-poor people escape poverty. For example, you can offer people livestock plus training on how to make money off that livestock plus a bit of cash to sustain them while they get things up and running. This premise became the bedrock of what BRAC called the “ultra-poor graduation program,” which aims to “graduate” recipients out of extreme poverty.”
BRAC pioneered this approach to poverty reduction 20 years ago. Then the Nobel Prize winning Economist duo of Abhijit Banerjee and Esther Duflo decided to study whether this approach to poverty reduction works.
“In 2015, a group of economists including Banerjee and Duflo published a huge randomized study looking at a graduation program in six countries: Ethiopia, Ghana, Honduras, India, Pakistan, and Peru. The program had been implemented from 2007 to 2014, and the results showed that it significantly increased incomes and savings, while also improving mental health and reducing hunger. The only exception was Honduras, where the chickens that people were given died of disease.
The study is definitely encouraging, but it looked at impacts only one year after the program. That’s key: Sometimes an anti-poverty experiment will show promising results after a year or, say, four years — but by year nine, the results tend to look much less rosy, perhaps because the control group catches up with the treatment group. So it’s very helpful when economists do a 10-year follow-up to check whether the initial results persisted over time.
That’s why it’s worth drilling down into another randomized controlled study published by Duflo, Banerjee, and co-author Garima Sharma just a few months ago. This study followed up on an experiment conducted in West Bengal, India. Ultra-poor people were given two cows or two goats, together with training on how to generate income from the livestock and a small subsistence stipend to keep them going. The researchers found that the initial results persisted, with study subjects enjoying higher income and consumption even a full decade later.
How exactly did this experiment help people escape poverty in the long term? What was the mechanism by which it worked?
At first, the beneficiaries were richer than the control group simply because they had the stipend and the transferred asset: the cows or goats. (They immediately could sell the animals’ milk, for one thing). By year three, many were using that as a jumping-off point to start up small non-farm businesses, like a seamstress shop, and earning more money as a result.
By year seven, however, a good chunk of their wages was coming from a different source: work in cities via migration. Rural families who had received aid built up enough resources to be able to send a member of their household to work in a big city. That migrant worker would then send money back home. By year 10, much of the beneficiaries’ money was coming from these remittances.”
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