What good are Savings Groups to poor people, really?
Most readers of Savings Revolution are familiar with Hugh Allen, founder of VSL Associates and the SAVIX database, who has done more to define and publicize Savings Groups, and train people to form them, than anyone, anywhere.
Dale Adams might be less well known to younger readers: Professor Emeritus of Agricultural, Environmental and Development Economics at Ohio State University, author of countless articles, and long-time provocateur on the internet, he has been a steady voice for helping poor people work their way out of poverty, while consistently and often provocatively cautioning the development industry against messing up markets with subsidies and development fads.
Both Hugh and Dale have irritated many people over the years, especially as history has shown their various heresies to be correct; fortunately, they write with enough intelligence and humor that they are generally forgiven. It is a pleasure to share the following discussion they held over the last few days on the role Savings Groups play in improving the lives of poor people.
Dale to Hugh
I applaud Savings Groups (SGs) because their promoters ignore the credit-need creed and, instead, emphasize savings. A bonus is that they are inexpensive to spawn and support. Still, I wonder about the value they add to development? Clearly, they enhance the social opportunities for millions of women and reinforce savings habits. Many members in these groups also willingly pay hefty rates on loans without suffering inner anguish about it, and thereby provide attractive returns to members who are primarily savers. Most importantly, savings groups are effective mechanisms for tens of millions of poor households to manage their risks and uncertainties better. Finally, they allow members to convert tiny amounts of savings into larger, more useful amounts -- to pay school fees and doctor’s bills, for example.
Nonetheless, I wonder if Peggy Lee, the Country and Western singing star, wasn’t thinking about savings groups when she sang: “Is that all there is? If so, let’s keep dancing, break out the booze, and have a ball!”
SGs provide compassionate services to tens of millions of poor people, but they are boosting few out of poverty, as they seldom create new jobs. Are there ways for savings groups to help more with jobs and poverty?
Hugh to Dale
Thanks for the soothing lead-in Dale, but you trod on my corns with the query “Is that all there is?” Let me start by asking how you might react if I asked the same about your checking account in your bank? Has it been used to create new jobs, except to the extent that it leverages liquidity from the reserve? How would all of us feel if suddenly the financial services we prize were deemed to be sub-optimal in terms of national capital formation? What would they say if they were badgered to prove their worth, on pain of being contemptible or irrelevant?
You go on to suggest that they boost few out of poverty and seldom create new jobs but how can this be asserted when the evidence is so sparse, since households that participate have never been tracked for the four or five years necessary for the evidence to be unassailable? Randomized Control Tests are deemed to be self-evidently excellent (they are certainly excellently expensive) while they have, in general, only tracked SGs for two or three years. Worse, the RCTs have comprised a large proportion of brand new groups and have, amusingly, demanded that impact is measured at the community level, not the group or member level.
But I digress. If I am a villager who is forced to sell his or her maize at post-harvest fire-sale prices to pay school fees, but now can take a loan that costs me 15% over 3 months while my maize remains in store and ultimately doubles in price, I move from being nailed by the market to manipulating and managing it to better advantage. All delivered by what you assume is a “non-productive” loan. I am managing my household cash flow, reducing risk and stress and optimizing returns. Is this nice, but not all that important? I don’t know about you Dale, but I value financial services for how they allow me to manage household cash-flow and I really don’t like the idea that somehow that’s not good enough. For whom?
I also value how savings groups on average, not only provide 20%+ returns on assets, but how they transform individuals from belief in their victimhood to a conviction of their competence and capabilities. They stir ambition, or they just build security. And that’s just fine.
Dale to Hugh
Most of my dance partners have likewise complained that I stepped on their corns, apparently a proclivity of mine. I also confess I have scant empirical evidence to back my claim that Savings Groups create few, new, steady jobs. My conclusions are based on visiting some SGs in Latin American, looking at ROSCAs around the world, and reading numerous publications on ROSCAs, ASCAs, and Savings Groups. Since SGs have the same DNA as spontaneous, self-help financial groups, the latter provide insights into what one might find in a careful study of SGs.
With your vast knowledge of SGs, I defer to your judgment about the jobs question. If I took a random sample of 100 of CARE’s Savings Groups, and then did a careful study of each of them, how many new and reliable jobs would I find that resulted from the entrepreneurial efforts of the groups or individual group members?
• How many new bicycle repair shops would I find that employed several non-family members?
• How many brick making operations?
• How many food processing facilities?
• How many transport companies?
• How many plants that produced knickknacks for export?
• How many commercial fishing operations? And so on…
In crafting answers to these questions, one must resist the old dodge used in the microcredit industry of citing a case that is three standard deviations from the mean and then claiming it represent all their “beneficiaries.”
Measuring the impact of Savings Groups on jobs and income faces another thicket, and that is dealing with what has been variously called the displacement problem, the fallacy of composition, or community externalities. For example, a member of an SG may use her loan or share-out to rent a stall in a central market, purchase inventory, and start to sell potatoes and vegetables. She may benefit from the steady employment, and may even occasionally employ her daughter or sister to help her. The rub comes when we note that the new vendor is but one of several dozen other women in the market all selling the same goods. Since these markets are usually static, a new vendor in the market only gains at the expense of other vendors. There is little or no additional economic benefit to the community that results from the new vender. Instead, it is a case of sharing poverty more widely.
Unfortunately, most of the investment options available to members of SGs involve displacement. In large measure, poor people are poor because they have low-return, and often highly risky investment options. Given this economic environment, why would members of SGs seek to become entrepreneurs, when they are already up to their eyebrows in risk management problems in their households?
Poverty alleviation is a heavy lift. Are there ways that SGs can assist in this lifting?
Hugh to Dale
Ah. So I was right about the risk to my corns. Dale, you fall in to the old trap of assuming that people want financial services so that they can invest their way out of poverty (and may therefore displace those already in the market). Very poor people tend not to do that. There’s too much risk. I’m not destitute but I’m terrified by debt and have never taken a business loan. I’m regularly reminded at home, that when I want to buy another nice machine tool for my workshop, the German word for debt is Schuld, which also translates as a grievous fault.
Finscope studies consistently show that entrepreneurship is about 4th or 5th on the list of uses for both savings and credit. Nearly everyone uses financial services, from whatever source, to mitigate risk and manage household cash flow; often to acquire household assets and to take advantage of more distant markets; to operate at a more significant scale and be able decide to sell when it suits them and not when they are desperate. Saying no to a really bad deal is a powerful first step up the ladder and that’s what savings groups enable their members to do, if need be. It is a modest proposition, but modesty has its advantages.
Take a look at the chart below (courtesy of Alex Brown). It suggests that people who are very poor and run IGAs tend to maximize drawings for consumption, while SMEs tend to maximize reinvestment for growth. These are massively different mindsets and one end isn’t good and the other bad. It is what it is. The IGA owner is probably far too busy with family responsibilities and family matters to be a full time entrepreneur, but would probably like to be a bit more to the right. For most poor people savings-based asset-building is highly attractive and SG membership is often sufficient. The SME owner may like to be a lot further to the right, and for that, debt finance (and a lot of competence) is a priority.
The point here is that as you move far to the right the services you need can’t be provided by an SG (longer-term low-interest loans and less emphasis on savings) and at that point institutional finance is just the thing, but you may need to experience what an SG can offer to develop the confidence and capabilities to make the move.
All of which probably explains why I am not a very big fan of ramming ‘linkages,’ down the throats of SGs (except for sopping up excess liquidity and reducing the risk of theft) because it’s the individual who is best positioned to make the move and institutions that want to link to SGs also want to maximize shareholder return: dropping excessively leveraged debt on SGs is not unprecedented. The whole proposition is, in my view, not too subtle and potentially dodgy. So, let’s not assume that linkages between SGs and FIs is a natural way of fostering entrepreneurship, ‘inclusion’ and economic efficiency or that SGs should be tasked with this responsibility. Especially let’s not forget that links may connect, but they also make up chains.
This is leading into another discussion, with its own heresies, but my point is that SGs prepare those who are capable and motivated to act as entrepreneurs and that without the formative experience of SG membership the likelihood that they’ll go anywhere near institutional finance is remote. There is a complementarity between investment focused finance and income-smoothing finance but you have to secure the one before the other.
As for the ‘three standard deviation’ atypical beneficiary trick, who’d have thought it?