It’s good to see microfinance researchers seriously studying alternatives to microloans or other microfinancial services. Very poor people need assets and a helping hand more than a loan, so why not hand out a cow or some other income-generating assets, offer training, and provide basic healthcare? That’s what an 18-month “Ultra-Poor Programme” run by SKS Microfinance in India did. But the randomised impact evaluation performed by Jonathan Morduch of New York University, Shamika Ravi of the Indian School of Business and Jonathan Bauchet of Purdue University on this programme turned up a “null” result, similar to those of randomised studies of microfinance.

Perhaps it is surprising to see SKS Microfinance (India’s largest microlender before 2010, and now perhaps most notorious microlender) giving non-repayable one-off kickstarts to ultra-poor households. But the intention of the programme was not purely altruistic; it was to “graduate” households into microfinance, by giving them assets to start a business.

In the programme in Andhra Pradesh evaluated by Morduch/Ravi/Bauchet, people who got a free asset and training to become microentrepreneurs were found to be no better off later than those who didn’t. They also didn’t manage to reduce their debts or increase their savings any more than others. Why? The authors believe it is

explained in large part by substitution with other economic activities. […] During the study period, wages in agricultural labor were rising steadily in the region, so that households in the control group were able to improve their economic conditions in parallel with households in the treatment group. (35)

The opportunities outside the self-employment programme offered similarly improving incomes as the opportunities offered by the programme itself. To what conclusion should this lead us about the concept of entrepreneurial self-lift out of poverty? Overall, the take-home message from the authors is eminently logical:

as a whole […] the program helped households create new livelihoods as intended. At the same time, the study highlights the need to interpret evaluations in the context of the economic opportunities faced by families and their ability to re-optimize their livelihood strategies. (36)

Read: it is possible to set up microenterprises with grants, yet we should consider the alternatives. But this falls short of the spelling out an equally possible conclusion from the data, which is that employment-generation is very valuable for the poor, and possibly the benefit is higher than the opportunity for entrepreneurial self-help. While perhaps subtle, the question these findings raise is programmatic: should development programmes focus on creating jobs or business opportunities?

“Substitution bias”: employment versus enterprise

The National Rural Employment Guarantee (NREG), an ambitious Indian government programme guaranteeing all households 100 days of paid labour at minimum wage, swept through the region at the time of the study. It would have been crucial to assess the direct impact of this alternative programme – income guarantees versus entrepreneurial asset transfers – on the target group. This rising tide lifted all boats, but the authors didn’t measure to what extent it directly affected the treatment and control households.

In this way the overall results at first sight are encouraging: both programmes (SKS’ Ultra-Poor Programme and the NREG) significantly raised incomes – for both groups from roughly 300 to roughly 500 Rupees per month over a three-year period. But did both programmes work as planned? Here things get trickier for fans of the microenterprise approach. Income in the control group rose, and assuming that the NREG played a large part in this, the NREG thus met its goal. But the SKS-driven microenterprise programme’s goal had been to equip households with assets which they would keep and use to permanently raise their incomes; yet a majority of households were no longer in possession of these assets by the end of the evaluation period.

The SKS-driven programme had given households a limited choice of assets with which to start their own income-generating activities:

local activities such as animal rearing (mainly a buffalo or goats) or horticulture nursery. Non-farm activities, such as tea shops, tailoring, or telephone booths, are also available. (11)

As the paper reports, of the 405 households who participated, nearly 90 percent chose animals as the asset they wished to use for income-generation. Of those, more than half chose a buffalo, roughly a third chose goats. Only seven percent opted for any “non-farm business”, while 3 percent bought land.

The limited options for microentrepreneurs

From a poor Indian villager’s perspective, raising an animal is a sensible choice. Water buffaloes and goats can feed off marginal land (roadsides, commons, wasteland) and even consume household waste. Buffaloes can be hired out or used for field work, and goats and buffaloes both give milk which can be sold; which is what the programme supposes by treating animal-rearing as an income generating activity. But above all, these animals are assets which can be sold in by the family in times of crisis or need – or butchered, as a last resort. Universally-useful things to have.

The problem is that, as a result, buffaloes and goats are already everywhere. In Indian villages, most people who can own a buffalo already do own a buffalo. Those who don’t are mostly very poor and therefore also couldn’t afford to buy milk. Some families are too wealthy to bother to keep animals, but won’t increase their purchase of milk just because supply goes up. Imagine an entire village trying to sell milk to each other. A dairy cooperative perhaps would allow milk to be processed, packaged and exported to other regions, and therefore sold at a higher price to a growing clientele – but that requires policy and larger loans (see Chapter 5 of Whose Sustainability Counts? for an intricate discussion).


Hippoes? No, just water buffaloes in a pond in Andhra Pradesh. Really, they’re everywhere. (own photo)

When selling the milk doesn’t work (or work very well), villagers can either sell or butcher the animal, or they can consume its milk themselves. The fact that more than half of all households surveyed were rid of their animals again within the observation period, and that on average household food expenditure fell, indicates that both choices –  sale of the asset, subsistence consumption – usually made more sense to the recipients than trying to earn an income off the animal.

Sell the milk or sell the buffalo

The study authors express some surprise that in the endline survey, only 43 percent of the 362 households who chose livestock as their asset actually still owned an animal. They suggest this is because many sold the animal to pay off debts. This may in cases be true; however if the asset actually generated any relevant income, isn’t it likelier that households would use the proceeds from the asset rather than the asset itself to pay off their debts?

The authors were further puzzled by an “under-reporting of livestock sales” because “fewer than 20 percent of households who participated in the program and did not own animals in the endline reported having sold their animal” (27). A simple explanation never considered is that many animals may have died. At no point do the authors indicate that the programme included key auxiliaries like vaccines or veterinary care for the animals, which can be expensive.

Crucially, the increase in income from the microentrepreneurial activities registered by the study didn’t actually improve their overall financial situation (relative to those who never received any grant). Put this together with the sale of the assets, and the premise that micro self-employment pays off becomes questionable. The animal rearing activities are a case in point for the other options, since each village not only already has many buffaloes and goats, but likely also enough tea-stands, tailors and mobile phone operators. The margins on such activities are abysmally small, and the opportunities for expansion limited, if not actually falling, as factory-made clothes become ubiquitous and almost every Indian already has their own mobile.

Comparing wages with self-employment

So, with its implicit comparison between self-employment (on the basis of a one-off grant) and employment, the study ultimately points toward the weaknesses of a microenterprise approach to development. Milford Bateman has been arguing this for years to no avail, and Hugh Sinclair more recently underscored it: inducing more people to enter an already-saturated, competitive, low-productivity local market – particularly a market for products with low demand elasticity – is no recipe for development. Researchers might even consider themselves happy to just find a “null” result instead of a deterioration among their “treatment” group.

Perhaps the clearest indication of the programme’s failure is that despite giving the households goods and services valued at $357, they were none the better off compared to the ones who got nothing and remained wage-dependent casual labourers (which by all standards is a fairly cruel way of existence in India).

But being employed through the NREG is not the same as being employed as a wage labourer full-stop, so the ultimate question is: which programme worked better? The fact that one group was given what was deemed an income-generating asset, while the other was given an income, but both fared equally well, indicates that for the poor these assets are less useful as means of income generation than advocates of entrepreneurial self-help think. It would be interesting then to compare which approach finally generated more lasting returns for the community overall, and therefore opened the path for longer-term development: the public works or the private buffaloes? For now, we can interpret this study as evidence for the value of employment-generation among the poorest, and for the problems routinely faced by microenterprises, even when they are started without a loan.