From Financial Times
As philanthropy becomes a common source of finance for poverty-fighting programmes, it is natural for donors to want data about their impact on the people they want to help.
Yet measuring the benefits of philanthropy is surprisingly hard. How can we define and measure “income” in a village of subsistence farmers? Can we ask a street kid enrolled in a violence-prevention programme about his illegal activities? How do we know if a change in nutritional outcomes was the result of a social programme and not some other variable, like a change in food prices? How can we measure non-quantitative or non-monetary outcomes, like women’s empowerment or entrepreneurial motivation?
For many years, aid impact studies were based on anecdotal evidence or fragments of data. Over the past decade, searching for a more rigorous approach, development researchers have applied the “gold standard” of medical research: randomised controlled trials. In an RCT, researchers allocate an intervention, such as a microfinance loan, to a randomly selected test group of people and compare their outcomes with a control group.
Evaluations like these cost time and money, and philanthropists might balk: their mission is to spend their dollars to help people, not to fund surveys and data-crunching. But that ignores the all-important economic principle of “opportunity cost”. Every dollar you spend on a non-effective, or less effective, programme is a dollar that is not working as hard as it could. This is a common concept in the private sector, where returns on investment are more easily observed. Yet philanthropists and charities often forsake measuring returns. As the scale and diversity of philanthropic efforts increase, such data become more crucial — any misalignment could have severe consequences.
Take microfinance: for years, philanthropists and governments touted microloans as a way of lifting people out of poverty. Tens of billions of dollars poured in annually. But, over time, the work of six independent teams of economists, running separate RCTs of micro-loan programmes in different countries, reached the same disappointing conclusion: while the poor liked and repaid the loans, going into debt did not bring the average borrower out of poverty.
Read the full post at Financial Times.
Tavneet Suri is an Associate Professor of Applied Economics at the MIT Sloan School of Management.