by Dean Karlan
That’s what most users would tell you, but most users would be wrong.
Suppose you click to fund a Peruvian client’s hundred-dollar loan. Here’s what happens behind the scenes: Some weeks before, bank staff went out to the field to take pictures and write up profiles of existing clients. Those profiles are what you see on the Web site. When you click to fund the woman’s loan, you make a hundred-dollar no-interest loan to Kiva. Kiva then makes a hundred-dollar no-interest loan to the client’s Peruvian microlender. The hundred dollars goes into the microlender’s loan portfolio, and is lent out to clients (but not the one you clicked on, who already has her loan) at around 40 to 70 percent APR. If the client you clicked on actually defaults on her loan, you could lose your hundred dollars, but that’s rare. Most of the time, either another client repays the loan for her, or the lender pays back the loan itself (in order to keep its “record” on Kiva.org clean, so that it can attract more money). That’s how it really works.
In innumerable casual conversations, people have told me that they use Kiva exactly because they love the idea that their money goes to that particular person whose story they read, whose story moved them. They feel a connection, and that inspires them to give.
I have mixed feelings about this. Raising more money is a good thing, of course. Kiva is out there raising millions (over a hundred million as of November 2009) for microcredit. The problem is that pitching a development program on something other than its impacts puts some distance between the means and the ends. Tactics that work brilliantly to mobilize donations—focusing on the identifiable victim, for instance—don’t necessarily work best to design programs that truly help poor people improve their lives.
The very best organizations pursue effectiveness in their fund-raising and in their programs with equal tenacity—and they usually end up with very different approaches to each. The point is that they have to recognize and respect that difference. We have to trust them to know that anecdotes are a far cry from real, systematic impact. And then we have to trust that, even as they use anecdotes to court donors, they will demand rigorous evidence to shape their programs.
For an organization to be worthy of that trust is no small feat.
We Can Demand Better
Fortunately, we don’t have to rely on development organizations to come around entirely on their own. If we want aid programs to do the most good, we have to recognize that as donors—the ones who pay the bills—we are the people who ultimately have the power to steer the ship. Yes, us. You and me.
Large donors—governments, major philanthropic foundations, the World Bank—clearly matter. But small donors matter even more. Individual donors in America contribute over $200 billion to charity every year, three times as much as the sum of all corporations, foundations, and bequests. As we’ve just seen, aid organizations have spared no effort in developing an acute understanding of what works to raise funds from you and me. You can be sure they’ll respond to the incentives we give them.
Jake and I will conclude this book with some practical suggestions for what you, as an individual, can do to help steer the ship. I hope I won’t spoil the suspense, though, if I give you one bottom line up-front. Cutting checks is good, but it’s not enough—especially when, thanks to behavioral marketing, we can do it with such little effort or deliberation.
Instead, we ought to find out where our money will make the biggest impact, and send it there. Some large donors, like the Bill & Melinda Gates Foundation and the Hewlett Foundation, try to do this as a matter of policy—and, sure enough, organizations respond by showing evidence that their programs work. Naturally, a small donor acting alone can’t drive that kind of change. But if enough small donors start to reward aid organizations for providing credible demonstrations of their impacts, you can bet that better programs will ultimately result. And perhaps, if a critical mass of donors does this together, we can slowly but surely contribute to a shift in how we as a society view the act of giving money. This isn’t just about making better use of the money raised, but also about helping to convince skeptics, who think aid isn’t worth giving, that development can work if done right.
Remember Cara’s Facebook page? There’s a serious point lurking there. Cara’s initial post showed not only that texting to Haiti was easy, but that it was cool—cool enough for her to think it was worth sharing on Facebook. Whether we like it or not, for most of us there’s an element of social display mixed up in our motivations for giving—and aid organizations know this, too, which is why visible signs of donation such as wristbands, stickers, and ribbons are also an effective fund-raising tool.
Anyone acting on good intentions deserves praise, no matter how far from optimal their actions may be. But how much more good could we do in the world if impact-informed giving came to be seen as the coolest kind of all?
Where This Book Is Going
So much for the theory. How do we actually tell which programs are doing the most good? We’ll get to the nitty-gritty in the next chapter. And in the rest of the book, Jake and I will share some of what we’ve learned about specific programs that really do work. The inspiration for many of these programs is surprisingly simple, and close to home: It’s taking innovative insights and solutions that have given us new ways to succeed in so many of the things we all do—rich and poor alike—and adapting them to the fight against poverty. For that reason, the chapters are organized and named according to those basic, universal activities, from Buying to Mating (and a quite a bit in between).
Chapter 3 examines an often-overlooked aspect of development programs: selling them to the poor. We often assume that designing a good program is all that matters. This is odd because nobody in the developed world thinks it’s sufficient to design a good product without also getting the sales pitch right.
Chapters 4 through 7 explore different aspects of microfinance, from the various flavors of microcredit to saving. The topic deserves this depth for two reasons. First, it touches practically all of us. In the United States, formal finance is universally available. If you have a credit card, a mortgage, or a bank account, you’re part of that vast network of borrowers and savers. The simple fact that financial solutions work for so many—and such a wide variety of—people in the developed world is a compelling argument that they can be tailored to help the poor. This has not gone unnoticed: Microcredit has generated more enthusiasm and support than perhaps any other development tool in history, and that’s the second reason for taking such a close look at it. It is so much a poster child of the aid industry that you might think it was a universal cure-all, and first we want to show that, for all its virtues, it is not a panacea—but it can generate some real benefits. Second, when it is designed well, it isn’t just about credit, but about savings too. Some of the most exciting work in microfinance has shifted away from borrowing and toward saving, with big donors like the Bill & Melinda Gates Foundation leading the charge.
Chapters 8 through 11 expand the search for poverty solutions beyond the realm of dollars and cents and into some places where you might not expect to find economists at work. From the public sphere—farmers tending their fields in the open, parents sending their children to school—to the more intimate spaces of doctors’ offices and finally people’s bedrooms, we’ll look at some innovative approaches to the problems surrounding agriculture, education, health, and sex. We will see that many of the tools we now use to do better in those areas of our own lives can serve the poor as well.
Finally, the book concludes with some ways forward—specific ideas that have the power to make a big difference in the lives of the poor, and things that each of us can do to help them succeed.
Most of the research I’ll talk about in this book is evaluation. It gives us concrete evidence, and concrete evidence truly should be the driving force in deciding which development approaches to support. But I don’t believe it should be the only consideration. There is room for creativity, for trying new things, and for failure. We
need new ideas to push us forward, and as donors we should reward those too.
Jake and I don’t claim to have all the answers in this book. As we shall see repeatedly, behavioral economics reveals that, just like everyone else, poor people make mistakes that end up making them poorer, sicker, and less happy. (If they didn’t, they could quickly escape poverty by selling self-help classes to the rest of us.) Identifying and correcting these mistakes is a prerequisite for solving global poverty, and we don’t have a foolproof way of achieving that any more than we have a foolproof way to make every person in the developed world win all of his or her personal battles.
That said, we in the developed world are beginning to chip away at these insidious and persistent problems for ourselves, one by one. We have found specific ways to improve our decisions and make our lives profoundly better. We can and do use new tools—like the Save More Tomorrow program and stickK.com, which we’ll see later—to spend smarter, save more, eat better, and lead lives more like the ones we imagine. The leap is in understanding that solutions like these, that have so enriched our own lives, can do the same for the people who need them most.
This book is about finding out which of them really work for the poor, and finding new solutions for the problems that remain.
2
TO WORK AGAINST POVERTY
How We Do What We Do
In 1992, my best friend and I were looking into ways to travel in Latin America for a year before going to graduate school. We had vague ideas about development projects, and an interest in human rights. He found a brochure for FINCA International in his college career services office. (FINCA stands for Foundation for International Community Assistance, but mostly goes by FINCA, and is now one of the better-funded microcredit organizations in the United States.) Neither of us had ever heard of FINCA, but the pamphlet caught our attention. It talked about “microcredit.” Neither of us had heard of that either. I remember being exhilarated by the description of FINCA’s program—making small loans to entrepreneurs in developing countries, which would allow them to expand their businesses and escape poverty.
At the time, I was two years into an investment banking job; I was constantly thinking about finance. Giving loans to the poor was a captivating idea, and we sent in a letter and our résumés.
We first proposed to visit FINCA’s offices in Latin America one by one and help them share information and ideas across countries (we wanted to travel throughout Latin America!), but the folks at FINCA International spotted some computer background on our résumés, and came back with a better idea: to go to El Salvador, learn the specialized banking software they used there, and adapt it for use in their other offices in Latin America. Off we went.
It wasn’t quite what we expected. What was supposed to be six weeks became thirty months, and the single biggest failure of my professional career.
My friend and I built a brand-new software system from scratch, tailored it to meet the byzantine accounting standards of four different countries, and customized it to accomodate the wide variety of lending practices that prevailed around the region. I later learned that it languished unused (except for a few years’ stint in El Salvador and Peru), and eventually was completely discarded. I was crushed. I felt that I had come up short.
But there was a silver lining to my experience with FINCA. I learned what I wanted to do.
Over the course of those thirty months, the most exciting moments took place not in the office or at the computer, but at the hundreds of meals I shared with FINCA employees and fellow aid workers. We talked about microcredit, what it was doing, why we thought it was working, and how we thought it could be done better. Our conversations were interesting, but that’s as far as they went. We didn’t have any solid ground on which to build. My first instinct was to look at the data, and to be a bit analytical about gauging the effectiveness of FINCA’s lending program. But there was no data to look at! The simple and sad fact was that neither we nor FINCA knew how—or even whether—microcredit was really helping the poor.
What we needed was some hard evidence of the impacts microcredit had on the lives of FINCA’s clients.
The first “impact evaluation” I ever saw of microcredit made my stomach ache. It was clearly intended to generate pretty numbers for a brochure to donors—not to determine whether something was really working. It asked clients something like, “You are eating better now, compared to before you joined FINCA, yes?” I was not yet trained in economics or surveying techniques, but I knew enough to know that this was not proving anything. (For the record, this was twenty years ago, so I can’t swear to the exact wording of the question posed to the clients. But I do know with certainty that the survey was given only to existing clients, which, as we will discuss later, is a deep flaw if you really want to know the impact of a program.) What I have since learned is that FINCA was doing just as much to measure its impact as anyone else. Which is to say, very little.
I thought about continuing to work with a microcredit organization, like FINCA—but what could I do to really make a difference? What did I know? Not much. And as far as I could tell, getting informed wasn’t just a matter of finding the right reading material. The information really wasn’t out there. So I decided to pursue a Ph.D. in economics, hoping that it would give me the skills I needed to return to microcredit and help figure out what really works and what does not.
When I got to graduate school it became clear that there were two types of people in the development universe: thinkers and doers. The doers were out in the real world, doing the best that they could—but they were essentially blind. Meanwhile, in the halls of academia, the thinkers were doing interesting analytical research—but they were often mute when it came to talking to the doers. Much of the research never made it out into the world.
Thinkers would argue that their research was “deeper than that, helping to understand the fundamentals of the way society works.” Fair enough. But this left me unsatisfied. I knew that at some point we had to get beyond the “deep” and move into results that tell us what to do. There were some notable exceptions to this separation between thinkers and doers. I vividly remember having coffee with Michael Kremer, then a professor at MIT, about potential topics for my dissertation. A few years before, Michael had begun running experiments (which we will see later in this book) measuring the impact of providing inputs like uniforms and textbooks to schools in Busia, Kenya. His work in Busia set the stage for me and many others. But I feared that it all seemed too simple compared to dissertations my peers were doing. The topic I wanted to research—which, albeit grounded in fancy theoretical questions about credit markets, basically boiled down to “flip a coin to determine whether or not a person gets a loan”—just didn’t feel hard or complicated or “smart” enough to count toward a Ph.D. in economics. I asked Michael whether he thought it would even be allowed as a dissertation topic, or if I would have to pursue it as a side project. To this day, I can remember his simple, poignant response: “What matters is the question, and the credibility with which you can answer it. That is what the world needs. You are asking an important question that has not been answered well, and this method is a better way to get at it. So go and do it!”
When I finished my graduate course work and started off as a professor, I wanted to make sure that my research, and the research of other like-minded professors, did not simply get published and sit on dusty bookshelves in academic halls. I saw a void, a need for a new kind of organization with a head for academia, but with its feet squarely in the real world. It would serve as a loudspeaker and an advocate for policy-relevant research, and be full of people ready and eager to help generate research results, and, most important, it would work to scale-up the ideas that are proven to work.
I pitched the idea to my graduate school advisers, Abhijit Banerjee, Esther Duflo, and Sendhil Mullainathan. They agreed that such an organization was sorely needed and, even better, they agreed to join the board (along with Ray F
isman, a professor from Columbia who knew us all well but was not doing this type of field research himself). Development Innovations was born, though its name would soon change. A year later, in 2003, Abhijit, Esther, and Sendhil started MIT’s Poverty Action Lab (now the Abdul Latif Jameel Poverty Action Lab, or J-PAL), a center at MIT and network of like-minded researchers from around the world. J-PAL has an equally strong fervor for finding rigorous solutions to the problems of poverty.
Esther is a true force de la nature, having just in the past two years collected numerous accolades—including a MacArthur Foundation “genius” fellowship and the John Bates Clark medal, often considered a precursor to the Nobel Prize in Economics—that make us all proud to be part of her circle (and I’m particularly proud to have been her first student!).
From the beginning, Abhijit, Esther, Sendhil, and I knew how closely the two organizations would work together, so we changed the name of Development Innovations to Innovations for Poverty Action (IPA), and continue working together to this day.
Each year IPA has managed to at least double in size, starting with $150 total revenue in 2002 (the filing fee in the state of New Jersey), to $18 million in grants and contracts income in 2009. We now have some four hundred employees and projects in thirty-two countries. While in some countries we do run antipoverty programs ourselves, the vast majority of our work around the world is collaborative: We partner with other implementing organizations—mostly local and international nonprofits—to design and manage program evaluations to find out what works and what doesn’t, and then we let the world know what we’ve learned.
