Creative Destruction or Destructive Destruction?

David Roodman’s Microfinance Open Book Blog showcased the ability of the internet to host an informative debate on whether microfinance is an example of Schumpeterian success—”aid building a thriving, disruptive industry that enriches the institutional fabric of nations”—or a Schumpeterian dead end—”an unfortunate work-around for the failures of mainstream financial systems to serve the poor.”

In a review of Roodman’s forthcoming book, which evaluates microfinance thus far, CGD non-resident fellow and acclaimed Harvard economist Lant Pritchett found fault with Roodman’s characterization of microfinance as a Schumpeterian success as well as the ambiguity of term “development.”

On the one side, Roodman argued for the value of empowering millions of poor with financial wherewithal; on the opposite side, Pritchett argued for the overriding importance of engendering a high productivity economy, which would not only ameliorate but also reduce poverty.

In response to this private discussion, Roodman authored a blog post maintaining the possible Schumpeterian merits of microfinance, pointing to the circuitous nature of economic development and big financial institutions such as Bank of America that once existed primarily to serve the poor and now acts as a mainstream financial institution.

His post spurred a string of comments, including one from Lant Pritchett himself. First, he stressed the importance of differentiating between the two ontological categories of development. The first refers to the betterment of the well-being of an individual human being, as measured by the human development index (HDI) or GDP per capita. The second refers to development at the country level—or any other larger social aggregate.

Due to these ontological disparities, some development initiatives—e.g., humanitarian food aid—only address development in the first sense, without achieving development in the second sense (in fact, some scholars consider food aid detrimental to development in the second sense.) With the caveat that he has not studied microfinance extensively, Pritchett posits that microfinance fulfills development in the first sense, without much influence on development in the second sense—”probably just not that big a deal one way or another.”

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