NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Last month GiveWell, a charity-rating website, tapped into an ongoing debate on how to evaluate the impact of microfinance and other base of the pyramid businesses. Are positive business results – in terms of uptake of microfinance and products aimed at creating social impact – an indication of social impact actually being achieved?

GiveWell’s Holden Karnofsky is skeptical, to the point of calling these approaches unproven. His critique boils down to this: product/service use does not equal development benefit. The purchase of products by poor customers – particularly taking on debt – does not mean that lives are being improved. Most directly, in questioning microfinance: “Just because someone is repaying their loans doesn’t mean they’re benefiting from the loans.”

It’s tough – bad buzz from charity raters can sting because perceptions matter and impact giving and lending. I’d like to do some rating of this charity rater. The quote above sounds smart and probing but I’m not sure it holds up to some scrutiny.

I understand GiveWell to be evaluating the use of philanthropic dollars for investment in businesses – not the businesses themselves. But GiveWell’s charity methodology is straining to incorporate businesses approaches. This is important beyond a series of blog posts because it encapsulates how traditional philanthropy strains to incorporate the potential for investment in low-profit or simply revenue-generating approaches to creating social imapct, despite how potentially powerful they can be. Most of all, it misses one of the most profound things that business approaches can do – give people power as consumers they previously did not have.

To start out, if GiveWell is attempting to measure revenue-generating approaches alongside pure aid-based approaches, it needs an ROI measurement that accounts for how donations will get recycled through multiple business cycles. All other things being equal, the presence of strong market demand for microfinance or a positive-impact consumer product should in fact indicate something critically important for GiveWell – a larger percent of every philanthropic dollar will probably get recycled and go farther than in an approach with weak market demand or no revenue streams.

For another thing, as others have pointed out, GiveWell defeats its own purpose if its demand for detailed measurement implicitly punishes approaches for reaching scale. It’s relatively straightforward to measure impact when an intervention is being delivered directly to its intended beneficiary. Tracking down the same for a product that is distributed commercially could destroy the margins on which such distribution is even made possible.

But if the inherent multiplicative potential that businesses have for impacting poverty still isn’t enough to change how one evaluates their impact, I believe that GiveWell is still overlooking and not measuring at all a profound outcome that philanthropic dollars can only provide when coupled with business: creating consumer power for the poor, and the choice and freedom that comes with that.

Consumer demand is an incredibly powerful thing. It shapes not only consumer products and the economy but communities and government action. It’s quite fungible into political power. Even with increased attention to the base of the pyramid from multinationals, the global poor are denied this, to a degree far beyond their relative lack of money, because almost nothing in the economy is designed for the scale of income they do have and their lack of access to credit.

If it’s assumed that you can’t pay for what you want, you’re never given the chance to tell anyone what you want. And so there’s no way you’re ever going to get it even if you could afford it when designed and financed properly.

Patient capital helps people tell the economy at large how they want their most basic material needs met, by giving them the ability to afford it and choose what is most important to them.

That in itself is a critical development outcome that should be measured and valued. Following Amartya Sen’s conception of ’development as freedom,’ it is the freedom to choose what’s in your life, and in a market economy the power to influence what’s around you.

Holden writes on GiveWell’s blog, “It looks to us like all of the pressure that these [microfinance] institutions face is to maximize scale and profits, without much eye to making sure that they’re improving clients’ lives.”

There’s something very strange to me about this. To find out whether microfinance is improving lives, I would ask microfinance customers whether they’d like to keep their access to microfinance or not (as, in fact, MFIs are forced to do at the end of every loan cycle), or if they would prefer to return to paying higher interest rates to informal moneylenders for the critical service of access to credit. In a market economy credit is as basic a need as literacy. I for one would not want to be the philanthropist who denies someone reasonably priced credit because I didn’t like, or didn’t know, what they’re doing with it. Simply allowing reasonably-priced access to capital for the poor is reason enough for me to support microfinance.

Once you give people the ability to shape through consumer demand both the content and form of what’s coming into their lives, suddenly it becomes more clear where development solutions will come from and how we will know what real solutions are. Consumer demand helps sort the good from the best approaches, and stretches the best approaches in their ability to scale.

Looking to the future, when household water purifiers start competing against water kiosks is when we’ll start to see the approaches that are robust enough to deliver water to billions of people. Would you ever see two charities compete in the same market to deliver water, with the loser going out of business? How would charity evaluators even rate the second market entrant that wreaks havoc on an existing charity, even if its approach is better and goes farther?

Until charity ratings can take into account in their methodologies the positive feedback loops produced by business approaches, the improvements that come when beneficiaries are able to shape interventions, and most of all the way that they deliver consumer power as a discrete development outcome, they will be unable to effectively comment on this emerging trend in philanthropy. Their analysis will hurt rather than help philanthropists trying to clearly evaluate patient capital as effective charity.