There has been a spate of very good books about economic development recently, and here is another. It's a sign of the subject's increasing maturity, founded on better data, experimental methods, and also the intellectual space for debate created by the end of the Cold War – whose chill grip had previously made discussions about development inescapably ideological. There are certainly still strong disagreements between economists, and they probably even correspond to a left-right political divide, but hypotheses are now tested rather than only asserted.
More Than Good Intentions: How a new economics is helping to solve global poverty by Dean Karlan and Jacob Appel is a tremendous addition to this burgeoning literature. The book draws from its authors' experiences in implementing a variety of schemes in developing countries, many of them in microfinance. Out of the school of experimental methods and behavioural economics centred on MIT's Jameel Poverty Action Lab, they have applied randomized control trials – analogous to the gold standard method for testing new medicines – to see which structures of loans or savings accounts or other potentially poverty-reducing intervention achieve their aims. (The recent forum in the Boston Review on experimental and behavioural economics in the field of development, with a lead essay by Rachel Glennester and Michael Kremer, makes for fascinating reading about the methodological approach.)
They also make the powerful point that it isn't enough for economists or aid workers to think up an effective scheme. The people the scheme is supposed to be helping have to take part – all too often, participation is low. This is where the behavioural 'nudges' (or marketing techniques, as we used to call them) come in.
I knew I was going to like this book when it referenced one of my favourites, Portfolios of the Poor, which describes actual financial needs through diaries kept by people in Bangladesh and South Africa. Karlan and Appel are equally clear-eyed about real rather than supposed needs – they note that borrowers can be satisfied with high APRs on loans because they need a small amount of money for a small time. The local moneylender might look usurious but is serving their need better than a microcredit organisation with rules about group meetings and loans much larger than actually needed.
Similarly, just as few people in poor countries as in rich ones are natural entrepreneurs, and many micro-entrepreneurs would prefer a job to their informal self-employment; so the focus of microcredit on entrepreneurship is largely romanticism – people might actually want loans for the equally valid purpose of buying a household implement. They conclude firmly that microfinance needs a rethink. Their willingness to challenge conventional wisdom is a welcome sign of the progress made in development economics.
I wasn't crazy about the style of the book – although admirably clear, it overdoes the chattiness for my taste. Still, it's an absolutely essential read for development economists and aid practitioners. It joins a growing list of very high calibre titles and would be worth reading alongside Charles Kenny's deliberately upbeat Getting Better to get a good flavour of the exciting potential for real contributions to improving the quality of life of people in poor countries.
