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- We use the term "economic empowerment" for programs that seek to directly (not through education or health) help people raise their incomes and standards of living.
- We have not identified any particular approach that has a demonstrably strong/promising track record. Unlike health, this cause does not appear to be a matter of getting proven programs to those who can't afford them.
- We recommend: GiveDirectly (cash transfers). For donors who want to support microfinance in particular, we suggest Small Enterprise Foundation
- Track records of different approaches to economic empowerment
- Our framework for evaluating economic empowerment charities
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 economic empowerment programs, and then lay out our principles for evaluating economic empowerment charities.
- GiveDirectly, which distributes cash to extremely poor individuals in Kenya (and is expanding to other countries). Directly transferring money to the very poor allows recipients to purchase that which they believe will help them most. Strong evidence indicates that cash transfers lead recipients to spend more on their basic needs (such as food) and may allow recipients to make investments with very high returns, with no evidence of large increases in spending on items like alcohol or tobacco. (For more, see our full report on cash transfers.)
For donors interested in supporting microfinance in particular, we suggest:
- Small Enterprise Foundation (SEF), 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) and (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.
Track records of different approaches to economic empowerment
Below we summarize what we know about the track record of different approaches to economic empowerment.
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 and other inputs. These programs do not have a demonstrable track record of success. More at our full review of agriculture programs.
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, and (b) its clients consistently repay their loans and stay in the program (i.e., do not drop out). 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).
Details at our full review of microfinance.
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 or on charities' 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). (For an example, see our blog post on The Acumen Fund.)
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 anyone who wishes to benefit from donor subsidies, and (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).
Much of the case for cash transfers relies on the judgment that cash transfers provide individuals with the resources to purchase those things they most need, as opposed to most charity, in which an outside organization runs the program it believes is best. In addition, the high-quality evidence that we have on cash transfers’ impact on consumption is generally encouraging. The evidence that cash transfers impact other factors (health, education, etc.) is less clear.
See our report on cash transfers in the developing world for our review of the available evidence on this program.
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:
- 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.
- 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
One approach to raising 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.
Low interest loans 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 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 productivity.
- 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.
Importantly, 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:
- GiveDirectly, which provides cash grants to poor households in Kenya (and is expanding to other countries). For more see our full review of GiveDirectly.
- For donors who want to support microfinance in particular, we suggest Small Enterprise Foundation, which works in South Africa. For more, see our full review of SEF.
- Aker, Jenny. 2008. Does digital divide or provide? The impact of cell phones on grain markets in Niger (PDF). BREAD Working Paper No. 177.
- Edmonds, Eric and Norbert Schady. 2008. Poverty alleviation and child labor (PDF). World Bank Policy Research Working Paper 4702.
- Grameen Foundation. Empowering the poor. http://www.grameenfoundation.org/what-we-do/empowering-poor (accessed July 2, 2010). Archived by WebCite® at http://www.webcitation.org/5qvL1sFIy.
- Jensen, Robert. 2007. The digital provide: Information (technology), market performance, and welfare in the south Indian fisheries sector (PDF). Quarterly Journal of Economics CXXII(3): 879-924.
- Paxson, Christina and Norbert Schady. 2007. The effects of cash transfers on child health and development in rural Ecuador (PDF). World Bank Policy Research Working Paper 4226.
- Tan, Hong and Gladys Lopez Acevedo. 2005. Evaluation training programs for small and medium enterprises: Lessons from Mexico (PDF). World Bank Policy Research Paper 3760.
- VisionSpring. Our story. http://www.visionspring.org/about/our-story.php (accessed July 2, 2010). Archived by WebCite® at http://www.webcitation.org/5qvL1sFIy.
"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.
For example, see VisionSpring, "Our Story."
For example, see Grameen Foundation, "Empowering the Poor."
Aker 2008 and Jensen 2007 (see abstracts).
See, for example, the high-quality studies of microfinance discussed in this blog post.
Note that a rigorous evaluation in Ecuador found that a program consisting of simple cash transfers improved the health of recipients' children. See Edmonds and Schady 2008 and Paxson and Schady 2007.