What are the returns to capital when it comes to microfinance? What are the effects of demand shocks, entrepreneurial ability, and other independent variables? Many in the microfinance (and enterprise development) communities have wondered about these very questions for years, but little empirical research has been done to support or reject working hypotheses. A recent paper by Stiglitz et. al. does tackle this issue, but so does a newly-released Working Paper.David McKenzie, a Senior Economist at the World Bank, is the co-author of the new paper, Returns to Capital in Microenterprises. McKenzie is also the featured speaker in an upcoming event hosted by the QED Group through its Microfinance After Hours Seminar Series (sponsored by USAID). Should be a good event - I'll be on vacation that week, but I recommend it highly.

As for the paper, here's an excerpt:

Small and informal firms account for a large share of employment in developing countries. The rapid expansion of microfinance services is based on the belief that these firms have productive investment opportunities and can enjoy high returns to capital if given the opportunity. However, measuring the return to capital is complicated by unobserved factors such as entrepreneurial ability and demand shocks, which are likely to be correlated with capital stock. We use a randomized experiment to overcome this problem, and to measure the return to capital for the average microenterprise in our sample, regardless of whether or not they apply for credit. We accomplish this by providing cash and equipment grants to small firms in Sri Lanka, and measuring the increase in profits arising from this exogenous (positive) shock to capital stock. After controlling for possible spillover effects, we find the average real return to capital to be 5.7 percent per month, substantially higher than the market interest rate. We then examine the heterogeneity of treatment effects to explore whether missing credit markets or missing insurance markets are the most likely cause of the high returns. Returns arefound to vary with entrepreneurial ability and with measures of other sources of cashwithin the household, but not to vary with risk aversion or uncertainty.

A quick roundup before the weekend.

First, here's a new blog to check out: Nubian Cheetah.  Its author, Nii Simmonds, is based here in DC (small world) and was recently a speaker at TED Africa.  Nii posted last week about a conversation he had with George Ayittey (also based here in DC, at American University) regarding a "Cheetah Sustainable Fund." 

This comes on the heels of Ayittey's construction of Hippos vs. Cheetahs to describe old-school, development money dependent African government bureaucrats (Hippos) vs. new-school, entrepreneurial African business and political leaders (Cheetahs).  See my previous post for details.

In any case, Nii and George brainstormed a Cheetah Fund:

During our 30 minute conversation about the TED conference, George asked, "so Nii how do we get you TED Cheetah's to contribute to African development"? I thought about it for a second and said, "I would be nice if TED sponsored fellows to their respective countries to use their professional work experience to help a business for a month or so. I heard a pause, and George said, "well that is nice, but what about a fund, called a Cheetah Fund that is sustainable was set-up to help TED fellows or other African Cheetahs with funding for their respective businesses."

Read the whole post, and consider adding Nii's blog to your RSS feeds.  I know I did.

Also of note, AIDG has launched a small business to bring sanitation services to Cap Hatien, Haiti's second-biggest city.  Check out the press release for details:

Over 60% of Cap-Haitien’s inhabitants do not have adequate sanitation in their homes. The public latrines that do exist are rarely maintained because of a lack of funds. With no other options, many residents resort to defecating in the open, often in nearby bodies of water, or in plastic bags. Feces in plastic bags has earned the facetious name of “flying toilets”, as they are often hurled onto solid waste piles or roofs.

AIDG’s aim is to create a small business that will alleviate part of this problem by maintaining the public latrines. Typically, latrines in Cap-Haitien are emptied by hand with shovels. It is slow, unpleasant, and dangerous work; the danger comes from the absence of suitable protective clothing or equipment. When finished, the waste is not properly disposed of and is usually dumped in local mangrove swamps, increasing the contamination of local water sources.

The development of a low-cost pumping solution would increase the speed and safety of latrine cleaning. Adaptation of AIDG’s biodigester technology could also allow for the safe processing of human waste to kill harmful pathogens.

Happy weekend, and here's hoping you don't encounter any 'flying toilets'!!