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Developing-world economic empowerment

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  • This cause is not a matter of getting proven programs to those who can't afford them. Many past programs have failed to increase incomes (and others have unexamined track records).
  • We recommend: Small Enterprise Foundation (microfinance) and Village Enterprise Fund (cash grants).

Table of Contents

The bottom line for donors

We use the term "economic empowerment" to refer to programs aiming directly at raising people's incomes, as opposed to improving their health or education. Such programs include agriculture-focused interventions (training, improved irrigation, etc. for farmers); microfinance; support for small and medium enterprises; and distribution of goods such as cell phones and spectacles. All are discussed below.

Below, we review what we know about the track record of programs in this area, and then lay out our principles for evaluating charities in this area.

Based on what we know, we recommend health programs as a superior way to help improve low-income people's lives compared to the options discussed on this page.

For donors interested in the cause of economic empowerment, we recommend:

  • Small Enterprise Foundation, a microfinance institution operating primarily in the Limpopo province of South Africa. SEF shows a strong focus on collecting the information necessary to assess its social impact, including (a) data on how many clients are dropping out of the program (and why); (b) data on whether SEF is succeeding in its attempt to target people with very low incomes. Nevertheless, we have concerns about SEF's social impact, particularly regarding its substantial dropout rates.
  • Village Enterprise Fund, which aims to provide grants (as opposed to loans) directly to extremely poor individuals living in the developing world. It stands out for its clear targeting of extremely poor clients (and data collection to ensure that the targeting is working), addressing a key concern about cash grants. At the same time, we are concerned that some of VEF's funds may not reach the intended recipients.

Track records of different economic empowerment programs

Agriculture

Many charities and official aid agencies have attempted to improve productivity and income for farmers, through programs including "rural extension" (education/knowledge sharing), irrigation, and provision of livestock among other things. The track record of these programs appears weak and is widely seen as disappointing. Past programs have suffered from multiple different kinds of failures to fully adapt external knowledge to local conditions.

Our full review of this area is here.

Microfinance

While encouraging anecdotes about microfinance are common, we have many questions - and have found relatively little information - about whether these anecdotes are representative. The few high-quality studies on microloans' impact on clients' incomes have found little impact.

We would guess that a microfinance institution is improving clients' lives, when it can be shown that (a) its clients are low-income and in need of assistance; (b) its clients consistently repay their loans. However, generalizations about how and how much such services improve lives are extremely difficult to make, and we have had difficulty finding microfinance institutions that can convincingly address points (a) and (b). Our full review of this area is here.

Small and medium enterprise (SME) support

Some programs aim specifically to help businesses (as opposed to individuals) in the developing world, in the hopes that they will create economic growth and jobs. There appears to be very little public information on the track record of such programs,1 and their ability to overcome the challenges of transferring investment/business knowledge from the developed world to the developing world (where we presume the environment is quite different). More at this blog post.

Distribution of specific products

Some programs focus on distribution of corrective lenses2, cell phones3 or other specific products that are intended to help people work more productively and raise their own incomes. The usefulness of these programs would presumably depend greatly on (a) whether they successfully reach the poor, rather than providing these products to anyone who wishes to benefit from donor subsidies; (b) whether the economic environment is such that these products allow improved productivity.

We have found very little research on the impact of programs in this category, aside from two studies attributing declines in local-market price variation over time to the use of cell phones4 (which may imply a beneficial effect on life outcomes from the natural proliferation of cell phones, but does little to answer question (a) at all or question (b) specifically for donor-subsidized programs).

No particularly promising programs

In the area of health, many programs have strong evidence bases, enough to lower the burden of proof (to some degree) on a charity running them. For example, if a charity demonstrated that it was raising vaccination rates, we would have a fair amount of confidence that it was improving life outcomes, even without separate documentation of changes in disease rates, mortality rates, etc. (The evidence base for vaccines is discussed here.)

From what we have seen, no analogy exists within the area of economic empowerment. In fact, none of the programs above appear to be associated with either (a) multiple, rigorous "micro" studies tracking the impact on individuals; (b) any large-scale "macro" successes. (More on "micro" and "macro" evidence here.)

Our framework for evaluating economic empowerment charities

One way that any charity in this area might secure our recommendation is through a direct impact evaluation - i.e., a rigorous examination of its own programs' effects on people's standard of living, along the lines of many of the evaluations published by the Poverty Action Lab.5 (Running a program with "similarities" to another evaluated program would not be sufficient; the charity would need to evaluate its own impact).

Such evaluations are generally rare, particularly in the area of economic empowerment. The remainder of this section outlines some other things we look for in economic empowerment charities.

In our view, a program aiming to raise people's incomes should be accomplishing some combination of the following:

  1. Transferring wealth to low-income people. This may mean literally
    giving out cash     or providing other things of value – including spectacles, cell phones, livestock, or loans – at donor-subsidized prices.

  2. Creating wealth by providing knowledge, technology, etc. to people and markets that can benefit from it.

Each of these goals comes with its own questions and concerns.

Transferring wealth to low-income people

The simplest way to raise people's incomes is to transfer wealth directly to them.6 However, programs that are explicitly giving away cash (or equivalents) would seem to be logical targets for exploitation by people with higher incomes. Therefore, we feel it is important for any wealth-transfer program to have a strong process for ensuring that its clients are truly in need, and to provide documentation that this is the case.

Note that many programs can effectively be "wealth transfer programs" even if they don't involve cash handouts. Any durable good – such as spectacles, cell phones, or rickshaws (or livestock) – that can potentially be re-sold for cash has both the advantages (giving low-income people the ability to determine their own needs) and the disadvantages (risk of exploitation by people with higher incomes) of cash transfers.

Loans ("microcredit") may fit in this category as well, if a heavily donor-subsidized loan can be informally re-loaned at a market rate, generating a profit.

Bottom line: a program that gives away valuable products (including cash, loans, or durable goods) - or sells them for below-market prices – has a burden of proof to show that its clients are likely to be low-income. If a program could demonstrate that it is transferring wealth to relatively low-income people, we would accept this as ample evidence that the program is improving lives.

Creating wealth

Creating wealth may come in many different forms, including

  • Educating farmers to improve their productivity.
  • Providing previously unavailable products (such as spectacles or irrigation products) that people can use to directly raise their incomes.
  • Providing startup businesses with capital and support so that they can add value over time.

In many cases, it may be possible for a wealth-creating program to charge its beneficiaries, such that it is (at least eventually) able to sustain itself without donations. For example, it seems logical that if spectacles provide more value (in terms of increased earning power) than they cost (all costs including distribution), a program may be able to sell the spectacles at (or slightly above) what they cost and thus sustain itself.

In these cases, donations may still be helpful at the early stages of a venture, before it reaches the scale where it can cover its costs. In other words, donors may absorb the risk of starting a venture, though the venture aims eventually to be creating enough wealth to sustain itself indefinitely.

We would consider recommending a charity with a credible case that it was using donations in this way – i.e., to take on the risks associated with starting ventures that eventually become self-sustaining. We would not necessarily require direct evaluation of such a program's impact on standard of living; an ability to fund its own costs might serve as ample proof that it is creating wealth and therefore improving the world. (Considerations of who its clients and employees are, and how exactly this wealth is created, would still be relevant – the mere fact of profit does not guarantee benefit, but in combination with other factors it could substitute for impact evaluation).

However, it is not enough for a charity to be planning a self-sustaining endpoint – due to our focus on proven programs, we would want to see a track record of obtaining sustainability with past ventures.

Bottom line: what we require to recommend an economic empowerment charity

When evaluating an economic empowerment charity, we look for any of the following:

  • A direct and rigorous evaluation of its programs' effects on clients' standards of living.
  • Strong evidence that it is transferring wealth (cash, loans, or durable goods) specifically to people with low incomes/standards of living.
  • A business plan consisting of using donations to start up ventures that eventually become self-sustaining, accompanied by a track record including some past successes in this area.

For donors interested in the cause of economic empowerment, we recommend:

  • Small Enterprise Foundation, a microfinance institution in South Africa. For more, see our full review of SEF.
  • Village Enterprise Fund, which aims to provide cash grants to poor individuals in Africa. For more, see our full review of VEF.

Sources

  1. 1.

    "How effective have such programs of training, consulting and technology support been in improving the performance or productivity of small and medium enterprises? Despite policy interest in the topic, knowledge about how effective SME programs are is very limited." Tan and Lopez Acevedo 2005, Pg 1. The paper goes on to analyze a particular program in Mexico, using analysis that we feel is vulnerable to selection bias.

  2. 2.

    For example, see VisionSpring 2010.

  3. 3.

    For example, see Grameen Foundation 2010.

  4. 4.

    Aker 2008 and Jensen 2007 (see abstracts).

  5. 5.

    See, for example, the high-quality studies of microfinance discussed in this blog post.

  6. 6.

    Note that a rigorous evaluation in Ecuador found that a program consisting of simple cash transfers improved the health of recipients' children. See Edmonds 2008 and Paxson 2007.

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