As reviewed earlier in this Report, recent legislation calls for USAID to develop and certify low-cost tools to allow microenterprise institutions to measure the percent of their clients who are “very poor” – defined as living on less than $1 a day at purchasing power parity or being among the poorest half of those under the national poverty line – and to require their use by USAID-supported institutions. As USAID reads the relevant legislation, Congress’s underlying intent was two-fold: first, to provide microenterprise institutions more effective means to understand the economic status of their clients and to target their programs toward poorer clients; and second, to give USAID a means to track its success in meeting the legislative mandate that at least 50 percent of USAID microenterprise funding should directly benefit the very poor, and to report on that success to Congress and the public.
USAID has worked hard to meet these goals. In consultation with the broader microenterprise community, USAID has developed (and continues to develop) a set of poverty assessment tools that enable institutions to estimate their clients’ living standards in relation to one or more specified poverty lines, rather than simply distinguishing between more- and less-poor clients. USAID’s tools enable both microenterprise partners and other development programs to measure the living standards of a sample of households, with reasonable accuracy and at relatively low cost – certainly far lower than measuring each household’s income or spending directly. Calibrated against an appropriate poverty line or set of living standards, such tools can help partner institutions develop a better understanding of the kinds of clients they are reaching. Moreover, once a tool has been developed for a given country, it can be re-calibrated against different or additional lines relatively easily. In sum, USAID’s poverty assessment tools provide a general means to measure absolute household poverty accurately and relatively cheaply.
Unfortunately, the law as currently written requires that USAID’s poverty assessment tools be calibrated against what appear to be unrealistically stringent standards of being “very poor.” The pattern of results from the first round of implementation of the poverty assessment tools strongly support this interpretation:
• among the 31 institutions that implemented the tools, only one reached the 50 percent target, and none exceeded it;
• the two institutions with the second- and third-highest reported shares of “very poor” clients tied at 43 percent; and
• the simple average of “very poor” clients among all 31 reporting institutions was 21.6 percent.
To the extent that this sample is representative of the broader set of USAID partners, this pattern of results means that USAID could not meet the legislative target of 50 percent of funding benefiting the very poor through any reallocation of funds among its current partner institutions. That dramatically limits USAID’s ability to meet the poverty targeting mandate that the law creates.
The only obvious way for USAID to achieve the poverty target would be to devote a large share of USAID microenterprise funds to subsidize the higher costs of partners that committed themselves to target exclusively households living in extreme poverty. Doing so would drive up their costs substantially and compromise USAID’s longstanding emphasis on sustainability, which is widely considered to be one of the central tenets of best practice in microfinance. Sustainability is strongly and repeatedly endorsed in the 2000 and 2004 Acts as one of Congress’s central goals for USAID’s microenterprise development efforts.
By requiring that USAID calibrate its tools against an unrealistically stringent standard of being “very poor,” the law as currently written actually reduces the potential for those tools to help partners effectively target their programs toward poorer clients. Properly designed poverty assessment tools would provide partners with as much information as possible on the actual living standards of all their clients – including those living on more than $1 per day, but nevertheless living in what virtually any American would view as desperate poverty – suffering serious malnutrition, high rates of disease and child mortality, and constant vulnerability to a wide range of economic and health risks. Essentially all such clients lack access to formal finance. These are exactly the type of clients that USAID’s partners are eager to serve; as the results of the poverty assessments reported here confirm, they represent the majority of clients of those partner institutions. In contrast, the law as currently written mandates that USAID’s tools classify all clients who spend more than $1.01 per day as “not very poor,” suggesting that all other information should be discarded as unimportant.
Requiring USAID to calibrate its poverty tools against an unrealistically low poverty line may also undermine partners’ motivation for applying the tools carefully and consistently. Though simple and low-cost compared with full-scale household surveys, implementing a USAID poverty tool nevertheless absorbs several thousand dollars plus several weeks of staff and management time to attend USAID training, train internal staff, hire and train interviewers, plan and conduct the assessment, enter the data, and write the summary report. In line with the requirements of the law, the first set of USAID poverty tools boil all that time and effort down into a single number per assessment: “percent of very poor.” Having made that effort, if the partner looks at the results and concludes that the assessment tool is calibrated against a poverty line that is too far below its organizational mission to be relevant, that conclusion could easily reduce the effort it puts into obtaining accurate results in subsequent years.
Finally, it is not clear what policy objective is served in mandating the development and implementation of poverty assessment tools limited to answering a single question – what percent of clients fall below a certain line – especially when that line is set so low that it excludes most clients of almost all USAID partner institutions. Especially at a time when the microenterprise field is moving away from a narrow focus on poverty measurement toward social performance measurement, which looks at a wide range of economic and social indicators – and which is finding favor among major private investors in microfinance – it makes little sense for USAID to focus its measurement efforts so narrowly on a data point not grounded in clear, practical implications for its partner institutions.
USAID welcomes the opportunity for a renewed discussion over the appropriate parameters of a poverty targeting mandate for the microenterprise institutions it supports, particularly regarding the definition of the “very poor.” With a growing number of poverty assessment tools coming on line, with the experience and results from the first year’s application of those tools in hand, and with growing experience elsewhere in the microenterprise field with alternative social performance measurement, we now have an opportunity for a far richer and better-informed discussion of these key issues than was possible when the legislation was passed. Shifting the focus of USAID’s poverty assessment tools to more realistic poverty lines, developed in collaboration with the microenterprise community and Congress, would enable USAID to better target its programs toward the poor while continuing to support progress toward sustainable, cost-effective microfinance and microenterprise development programs.
