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Barbara Magnoni, President of EA Consultants, an international development consulting firm with a specialty in finance, began a debate in the comments of our interview series with Abhijit Banerjee and Esther Duflo. Our conversation was focused on the issues around investing in microcredit focused on women. I asked Barbara to join me in an asynchronous “debate” that would be a bit more accessible than a conversation in the comments. Herewith is our discussion on the subject. Please weigh in with your own thoughts either in the comments or on your own blog of choice (but be sure to tell us where to find your thoughts via the comments or on Twitter). 

Barbara: I read your interview with Esther and Abhijit with interest. At one point you comment: “On average women entrepreneurs’ businesses don’t grow. But you dig a layer beneath the headlines and you find that a lot of women entrepreneurs don’t want to grow their businesses. They only want to work a few hours a week, that’s all they have time for and they need a lot of flexibility. Women like that are shut out of traditional labor markets so they start their own home-based business.” That caught my attention.

We worked on a study in Latin America on women entrepreneurs and didn’t find this at all. In “A Business to Call her Own”, we spoke to women throughout the region and found that it isn’t that they didn’t want to grow, but that they were severely constrained by the choice of sector they went into, their limited time, limited savings to use to make capital investments, and low skill levels. If you have a business that is ‘hand to mouth’ you want it to grow. Maybe not to become a huge company, but to become sustainable and offer a decent living for your family.

I would be interested in any further substantiation of your views. The issue of women and business is understudied, and is clearly linked to many of the issues posed in your interview.

Tim: I agree that most microentrepreneurs want their businesses to be self-sustaining and to generate cash flow (though their profitability seems to depend entirely on whether you account for the cost of family labor, see Poor Economics and David McKenzie on this). But there doesn’t seem to be much evidence that microentrepreneurs, women or men, aspire to grow their businesses to the scale that would have a societal impact or push a family into the middle class. When they do have access to fresh capital, they don’t seem to invest much of it in their businesses. Surveys tend to indicate that their aspiration is for a job, not to run a growing business.

Certainly this isn’t true for everyone but it is true for many. And if the evidence from developed nations is any guide, then it is more likely that men aspire to build these larger, truly profitable businesses. For the evidence for this claim, see Scott Shane’s book The Illusions of Entrepreneurship, pp 130 to 133, where he cites more than a dozen studies.

One of the explanations that is consistent, as you note, is that women tend to run businesses in industries that have less profit potential. In some cases this is clearly a societal construct around “appropriate” women’s work (see for instance McKenzie’s work in Sri Lanka), but it’s also likely that it has something to do with the choices women make about what industries to be in—in other words they choose low-profit, low-growth businesses because those are the ones that offer the flexibility they need to be able to meet their other commitments.

This is not an argument for restricting women’s access to capital. But it is an argument to think very differently about the value and purpose of microcredit focused on women. I believe it’s a mistake to think of such a product as entrepreneurial growth capital.

Barbara: I am still skeptical of this evidence. I don’t have the book handy, but it seems to be focused on only developed markets. In many of the developing countries that I work, formal sector wages for similar skilled people are lower than those in the informal sector and many SMEs pay their employees under the table, so they aren’t often in the formal sector, although they are employed rather than independent workers.

While I agree with many of your points, I am concerned that the limited recent research is leading to recommendations that promote lending to men’s business for growth rather than betting on women. Perhaps it depends on your goals, but I think that women’s businesses (some, not all) could be equally if not more successful with some capital, and additional support and mentoring. If we give up on that possibility, we give up on trying to reduce the gender gap, and promote the status quo, of men earning money and women in the household with limited financial resources. I believe development experts over 30 years ago agreed that this economic structure was not ideal in providing families with health, food and education they needed.

Of course another approach would be to work to change men’s role in the household so that they take on greater financial and family responsibilities, and thus prioritize those expenses more, but that may just lead to research saying that people shouldn’t provide men with investment capital, because they won’t put it to work.

I think ultimately, we don’t know enough and more research should be done around these questions.

Tim: We certainly agree that there isn’t enough research on this topic. As is all too common in development circles, the prevailing view seems to have swung from one distortion (ignoring women) to another (“we must focus on women and girls”).

In this case, I think that distortion isn’t exactly harmful but it isn’t helping. Here’s my operating hypothesis: as family incomes rise, families invest more in all their children, boys and girls. That investment often yields much higher levels of schooling for girls which in turn increases their opportunities.

If you accept that hypothesis, it makes sense to focus on raising family incomes in the fastest way possible. That in turn suggests that we should be paying attention to what groups generate the highest returns on capital. Given the status quo, that again implies that it makes a lot of sense to provide working capital to male entrepreneurs—and then work with them to encourage them to invest in all of their children.

For me, that’s as plausible a path to both increasing family welfare and addressing gender imbalances as focusing microcredit outreach on women who, until you change societal norms, will likely earn very low returns on capital and raise family incomes less.

I think you also have to take into account sociological research from around the world that men’s behavior in terms of investing in their families is strongly affected by their ability to be productive and be providers—in other words, to live into the existing societal norms. When men do not have opportunities to work and provide, they tend to abandon a role as investors in their families. By excluding them from access to credit in favor of their wives, we are creating a self-fulfilling prophecy about the behavior of the men.

In sum, I support working to address gender imbalances and creating equality of opportunity for men and women. But I think pursuing that goal via a “preferential option for the poor women” (to paraphrase from the liberation theology movement) isn’t the best way of achieving that goal.

Barbara: Your doubts about development practice focusing on women and girls are justified. That is, there is just as little proof that this is a useful strategy as there is that lending money to men will only drive them to drink and gamble it away (another popular and anecdotally common hypothesis).  However, what is extremely real is the discrimination and power inequality of women in many poor households. Family violence, low self-esteem and inaccessibility of land rights are only some of the conditions we run across frequently in women in our work. In your operating hypothesis above, you don’t take into account these issues but look only at financial wellbeing as a sign of development of socio-economic wellbeing. Additionally, you suggest those who currently wield the greatest power in the family should continue to do so, by supporting their earning potential over that of others in the family. I suggest that this is flawed from a humanistic perspective. I believe that we should strive to ensure that women and men have freedom, opportunity and choice. These are critical aspects of a developed society.

A final point about your hypothesis. It assumes that in general, men will prioritize the welfare of their families, and thus their wellbeing will trickle down to that of girls. I think like most trickle-down theory, there is some truth to this, but the practical reality is that it is all too slow and that it often leads to more inequality. I have some suggestive evidence that men don’t re-invest as much of their business profits as women into the family.  Without parallel efforts to encourage such investment by men, the “return on capital” for men’s businesses may be quite high in terms of the “math”, but low in terms if you look at the return to the welfare of the family. In the paper I note above, we interviewed male and female merchants in Nicaragua and found that men more often save to reduce their cost of capital while women more often save to plug up gaps in the family economy, pay for schooling, and make up for economic downturns. In the same study, we notice that men’s savings balances went up during economic crises, while women’s fell.  In sum, doing the math is useful, but probably not sufficient when thinking about who to support and how.

Tim: There are important questions that remain to be answered on family dynamics (and they may have very different answers based on a variety of cultural, geographic and economic contexts). Your point about women spending relatively more of their income on the family is true as far as I know but I think fails to take into account the dynamics of family dynamics. As I discussed with Esther in the interview, she and Chris Udry have found suggestive evidence that this disparity is a cultural construct. In other words, women spend more on families because caring for families is “women’s work.” As women gain disposable income from growing businesses their spending may end up looking more like that of their husbands. In other words, changing the cultural constructs that limit women’s opportunities may very well erode the basis for the difference in spending patters of men and women.

In terms of the research in Nicaragua, I find it very plausible—but it also underlies the basic point about how to think about investing in women via microcredit. The behavior of men you describe is consistent with what we would expect of entrepreneurs who were focused on growing their businesses and generating increased profits. The behavior of the women is not. Thus, thinking about microcredit focused on women as entrepreneurial capital—e.g. capital designed to foment growing, profitable businesses—may be in part contradictory. So if the goal is increasing the welfare of women and girls, why not look instead to direct cash transfers rather than requiring these women to start businesses with all the attendant demands that takes?

That’s were I return to my basic suspicion that microcredit dressed up as encouraging microenterprise for women is a poor way of achieving the stated goals whether those goals are benefiting women and girls or those goals are creating growing, profitable businesses.

Barbara: Ouch! So women and children at home getting handouts, huh? Well, that may get them better fed, but will it help women achieve more freedom? I look forward to hearing what others say.



Ed. Note: David sent me this comment via email.

Barbara and Tim,

this is debate is quite interesting.

Let me correct one comment made by Tim: “When they do have access to fresh capital, they don’t seem to invest much of it in their businesses.“ Our evidence from Sri Lanka is that males at least are investing a good share of the grants we gave them in their business. Moreover, we have a new paper (not yet public) based on data from following up with these enterprises 5-6 years after the initial grants. We find that these one-off grants seem to have permanently improved incomes and survivorship for these male-owned businesses. That said, Tim’s point that few of these businesses then grow to the level that they will support other workers or make a big difference to society is dead on.
One additional point is that there are certainly lots of anecdotes about women getting loans in their name only to be used for the businesses of husbands.

Finally, in terms of Barbara’s comments about empowerment, I haven’t seen a single RCT that has shown increased empowerment from access to microfinance.

David McKenzie

September 08, 2011

Hi David & Tim—

I agree great discussion….

To David’s last paragraph:
“Finally, in terms of Barbara’s comments about empowerment, I haven’t seen a single RCT that has shown increased empowerment from access to microfinance.“

I agree, I have not seen any microcredit studies that have shown this in an RCT.  BUT, our commitment savings account study in the Philippines did:

So microsavings yes has shown one.  Microcredit, no has not.  Of course, all caveats required, not too many studies to point to (yet).


September 09, 2011

Thanks for engaging. Two quick points: 1) I wasn’t specifically referring to empowerment, but a broader issue of equality and freedom. My grandmother and my mother taught me that a woman isn’t free unless she has her own money. Some are lucky enough to be born with it, others, have to come up with it on their own.Of course, it’s related to empowerment, but it’s a smaller step, in my opinion.The good news is, it’s measurable!

ans 2) Men are investing in their businesses probably because a. they tend to grow more vertically rather than diversify into new businesses as women do and b. because there is often a woman in the household making supplementary income to cover shortfalls in basic household needs. If we can help change the way women see their roles, and ensure men support these roles and take on more family responsibilities, we may get equality and more jobs to boot, but someone needs to want that to happen.

September 09, 2011

Very interesting debate. Bottom line is we need more evidence to support either hypothesis.  It might, however, be worth incorporating into this debate evidence from the developed world showing that countries where women do not actively participate in the workforce are handicapped from a growth perspective. Is it really in the long-term benefit of economic growth to promote an economic model where women stay at home relying on government handouts? From an Economist article: “Furthermore, the increase in female employment in the rich world has been the main driving force of growth in the past couple of decades. Those women have contributed more to global GDP growth than have either new technology or the new giants, China and India.“

September 14, 2011


thanks for the comment and the pointer.

I think we all agree that empowering women and helping them fulfill their potential is the ultimate goal.

The real question is what are the best mechanisms for achieving that goal. Setting up women as low-skill, low-profit microentrepreneurs, I argue, isn’t the best way to reach that goal. We’re more likely to get there by focusing on funding the entrepreneurs who are most likely to create scalable businesses that hire workers, including women.

In other words we should stop focusing on women and start focusing on growing businesses regardless of the gender of the proprietor. I think the microfinance movement has shown that there are women out there capable and ready to build growing, employer businesses.

But, as you say, we are operating without much evidence either way. That’s why I’m so excited to see the results of David McKenzie’s (and his colleagues’) work on the factors that may help push microenterprises into growing firms.


September 14, 2011

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