Evaluating Thailand's Microfinance Experiment
Microfinance is widely considered to be an effective tool against poverty, but there have been few studies so far to measure whether these programs are the most cost-effective use of funds.
Evaluating microfinance is important because proponents argue that it is more financially viable than other means of fighting poverty because it can facilitate borrowing and reduce the costs of borrowing for individuals with limited collateral. On the other side, critics point to high default rates, reliance on subsidies, and the lack of hard evidence for the impact on households. So far, the few efforts to evaluate the impacts of microfinance institutions have produced mixed and even contradictory results.
This research brief, based on two papers by Joseph P. Kaboski and Robert M. Townsend, describes the first structural attempt to model and evaluate the impact of microfinance, drawing on data from the ongoing Townsend Thai Survey as it measures changes from the Thai Million Baht Village Fund program.
This structural approach enabled the researchers to undertake a quantitative interpretation of the data, to make predictions that counter actual policy, and to evaluate the program according to well-defined norms. On this basis, the authors determined that the program led to more consumption rather than investment and cost 20 percent more to achieve its benefits than a simple transfer of funds would have. However, there was considerable variance in how individual households were affected by the available credit, with some households reducing consumption in order to save up for larger investments and ultimately gaining substantially.