Michael Fitzgerald, AB’86 https://mag.uchicago.edu/author/michael-fitzgerald-ab86 en Delight in discovery https://mag.uchicago.edu/economics-business/delight-discovery <div class="field field--name-field-letter-box-story-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/1412_Fitzgerald_Delight-discovery.png" width="700" height="325" alt="" typeof="foaf:Image" class="img-responsive" /> </div> <span><span lang="" about="/profile/rsmith" typeof="schema:Person" property="schema:name" datatype="">rsmith</span></span> <span>Wed, 10/29/2014 - 12:33</span> <div class="field field--name-field-caption field--type-text-long field--label-hidden field--item"><p>Photography by Bryce Vickmark</p> </div> <div class="field field--name-field-refauthors field--type-entity-reference field--label-visually_hidden"> <div class="field--label sr-only">Author</div> <div class="field__items"> <div class="field--item"> <div about="/author/michael-fitzgerald-ab86"> <a href="/author/michael-fitzgerald-ab86"> <div class="field field--name-name field--type-string field--label-hidden field--item">Michael Fitzgerald, AB’86</div> </a> </div> </div> </div> </div> <div class="field field--name-field-refsource field--type-entity-reference field--label-hidden field--item"><a href="/publication-sources/university-chicago-magazine" hreflang="en">The University of Chicago Magazine</a></div> <div class="field field--name-field-issue field--type-text field--label-hidden field--item">Nov–Dec/14</div> <div class="field field--name-field-subhead field--type-text-long field--label-hidden field--item"><p>Economic historian Claudia Goldin, AM’69, PhD’72, takes a detective’s joy in gathering clues, analyzing data, and reconstructing the stories behind social issues.</p> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>Claudia Goldin thinks of herself as Sherlock Holmes. With titles like<em> <a href="https://www.goodreads.com/review/show/1099076956" target="_blank">Understanding the Gender Gap</a></em> and <em><a href="https://www.goodreads.com/review/show/1099079173" target="_blank">The Regulated Economy</a></em>, her case file lacks the criminal flavor of Sir Arthur Conan Doyle’s oeuvre, but Goldin, AM’69, PhD’72, brings a sleuth’s methods to complex puzzles of economic history. How did urban slavery work? What effect did the Great Depression have on the labor force? What caused government corruption in the United States to recede over the 20th century? How do technology and education affect income inequality? And her most famous case, why do women make less money than men?</p> <p>Since 1990 Goldin has <a href="http://scholar.harvard.edu/goldin/home" target="_blank">pursued these questions at Harvard University</a>, where she’s the Henry Lee Professor of Economics and was the first woman granted tenure by her department. Why does she identify with Holmes? “You can see his mind at work. He goes out into the really dirty part of the town and lives there and hangs out and gets to know the ‘street Arabs.’ He collects all this and then sits down and comes up with a theory to help him solve the problem. That’s what I do.”</p> <p>A labor economist and economic historian, Goldin excavates clues from the past, working the archives instead of the streets, to illuminate social issues of today and yesterday. From the beginning of her career, the hunt for data has engrossed her. <a href="http://scholar.harvard.edu/lkatz/home" target="_blank">Lawrence Katz</a>—Goldin’s partner, Harvard colleague, and frequent research collaborator—tells how as a graduate student Goldin traveled to several archives in the South to gather data. When she got back, her dissertation director, University of Chicago professor <a href="http://magazine.uchicago.edu/0726/features/human.shtml" target="_blank">Robert Fogel</a>, asked for the receipts from her expenses. She told him she had none. “He said, ‘Well, how did you get from Raleigh to Durham?’ She’d hitchhiked or found rides. She almost always seemed to run into someone at an archive who let her stay at their place.”</p> <p>At Goldin’s insistence, she and Katz traveled to the Midwest to research their book <em><a href="https://www.goodreads.com/review/show/1099081524" target="_blank">The Race between Education and Technology</a></em> (Harvard University Press, 2008), which examines how public education took shape in this country, spreading from urban to rural areas in the early 1900s. They visited some of the high schools that were pioneers in early 20th-century education. “We got to see the expansion of education in places like Iowa and Nebraska,” Katz says.</p> <p>Goldin loves to get out in the field and see how people work, like an economic ethnographer, or a detective finding clues. In a recent address to the <a href="https://www.aeaweb.org/" target="_blank">American Economic Association</a> (AEA), of which she was president in 2013, Goldin paused after presenting her data to say, “Holmes at this point sends out Watson for a lot of tobacco, fills the room with smoke, thinks, and comes up with a theory.”</p> <p>Her investigations span many subjects, with a common thread of how people have engaged in the economy over time. In a field where more prestige is accorded to quantitative approaches and economic theory, Goldin is one of the few economic historians considered among the elite (others are <a href="http://web.stanford.edu/~avner/" target="_blank">Avner Greif</a> at Stanford, <a href="http://faculty.wcas.northwestern.edu/~jmokyr/" target="_blank">Joel Mokyr</a> at Northwestern, and <a href="http://eml.berkeley.edu/~eichengr/" target="_blank">Barry Eichengreen</a> at the University of California, Berkeley). Her book <em>Understanding the Gender Gap: An Economic History of American Women</em> (Oxford University Press, 1990) remains the foundational work on the rise of women in the US labor force and the impact of that movement on the economy. It’s research she continues to build on.</p> <p>“She’s been effective at making economic history relevant,” says <a href="http://scholar.harvard.edu/glaeser/home" target="_blank">Edward Glaeser</a>, PhD’92, the Harvard urban economist who coedited a book on the economics of corruption with Goldin. Glaeser calls <em>The Race between Technology and Education</em> one of the four or five most important books in economics in the past 50 years. No one can touch her work on gender, the family, and their relation to skills, he adds. “Everything I know about the changing nature of women [in the economy], I know from her or one of her students.”</p> <p><strong>As a child growing up in a science-loving household</strong> in a lower-middle-class Bronx neighborhood, Goldin thought she’d be a different kind of detective. Heavily influenced by Paul de Kruif’s <em><a href="https://www.goodreads.com/book/show/10626554-the-microbe-hunters?from_search=true" target="_blank">The Microbe Hunters</a></em> (Harcourt, Brace, and Company, 1926), she dreamed of becoming a bacteriologist.</p> <p>Her ambitions were reinforced at the Bronx High School of Science, from which she graduated in 1963. She thought she knew everything. “Here I’m from the Bronx,” she remembers, and “I could maneuver around very difficult terrain. I could find a bathroom at the Waldorf Astoria and have no one stop me. I knew how to get around. I was street-smart.” That fall the family drove to Ithaca in the Plymouth that was her father’s first car. While they waited to unload Goldin’s things, a young woman climbed on top of her family’s Mercedes a couple of cars ahead. “She was waving her arms and she said, ‘This is so Machiavellian.’ And I thought to myself, I do not know anything.”</p> <p>She determined to drink in as much of the liberal arts as she could at Cornell: humanities, political science, history, and an industrial organization course with the economist Alfred Kahn. A charming showman in the classroom who would later become known as the father of airline deregulation, Kahn captured her imagination. Economics became her course of inquiry.</p> <p>In 1967, still interested in industrial organization, which she had written her thesis on, Goldin went to the University of Chicago for graduate school. She was pulled there by the presence of faculty like <a href="http://research.chicagobooth.edu/stigler/about-the-center/george-stigler" target="_blank">George Stigler</a>, PhD’38; <a href="http://uchiblogo.uchicago.edu/archives/2011/04/onceinalifetime.html" target="_blank">Ronald Coase</a>; <a href="https://economics.uchicago.edu/facstaff/telser.shtml" target="_blank">Lester Telser</a>, AM’53, PhD’56; and <a href="http://www.chicagobooth.edu/faculty/emeriti/Sam-Peltzman" target="_blank">Sam Peltzman</a>, PhD’65, now professor emeritus at Chicago Booth. In 1970 <a href="https://economics.uchicago.edu/facstaff/becker.shtml" target="_blank">Gary Becker</a>, AM’53, PhD’55, returned for his second stint at the University. Becker, she says, “truly blew my mind open. I had never thought of economics the way he did it.” She became his research assistant; he a lasting influence on her. “He used the finest, sharpest scalpel to cut away everything that doesn’t matter,” she says.</p> <p>The historian in Goldin did wonder about what got discarded: “The urge is to put back all the stuff that he claimed didn’t matter, and to say, but it does matter.” The economist in her stood in admiration: “But at the same time you have this sparkling gem you can hold and work with—a model that starts speaking back to you and gives you a greater understanding because of its brilliance and simplicity.”</p> <p>Around the same time, Goldin took a class with Fogel, the economic historian who would become her other major influence and who, like Becker, would go on to become a Nobel laureate. “Gary and Bob Fogel shared this incredible knack for taking the complex and making it simple,” she says. “Bob moved more in the direction of the empirics; Gary in the direction of the theory.”</p> <p>Drawn to history since Cornell, she worked with Fogel on her dissertation, a quantitative analysis of slavery in antebellum Southern cities. In history and economic history, slavery was the subject of intense scholarly attention at the time. Through her history-student roommate, Barbara Sosnowski, AM’71, Goldin had discovered Richard Wade’s book <em><a href="https://www.goodreads.com/book/show/2871168-slavery-in-the-cities" target="_blank">Slavery in the Cities</a></em> (Oxford University Press, 1964), which argued that slavery and urban settings—where slaves lived apart from masters and sometimes hired out their own labor—were incompatible. Looking at data about markets and competition in those cities, Goldin concluded the opposite. Slavery was a more flexible economic system than was generally credited, she wrote, and would not soon have withered away without emancipation.</p> <p>After receiving her PhD, Goldin taught at the University of Wisconsin, Princeton, and the University of Pennsylvania. As she continued to study the economics of the American South, the issues around women, families, and work that have defined her career began to command her attention. She “was sniffing around for something of deeper personal interest,” Goldin wrote in an autobiographical essay, “<a href="http://scholar.harvard.edu/files/goldin/files/detective.doc" target="_blank">The Economist as Detective</a>.” As her focus shifted to the family, Goldin felt herself getting warmer. Around 1980 she realized her work was “slighting the family member who would undergo the most profound change over the long run—the wife and mother.”</p> <p>Often unrepresented in historical data, married women and their labor had a hidden story that Goldin grew passionate to uncover. These investigations led to <em>Understanding the Gender Gap</em>—eventually. First Goldin had a chance to get her hands dirty digging up clues. In the National Archives, where the stacks were not yet off limits to visitors, she found forgotten surveys conducted through much of the 20th century by the US Department of Labor’s Women’s Bureau. They gave her data on women’s work histories before 1940, on the “marriage bars” that held wedded women out of much of the workforce in the 1920s and 1930s, and on wages. The find enabled her to write a comprehensive economic history of American women that remains a landmark.</p> <p><strong>The gender gap, a term coined by <a href="http://www.feminist.org/welcome/esbio.html" target="_blank">Eleanor Smeal </a>of the <a href="http://now.org/" target="_blank">National Organization of Women</a></strong> in 1981 to discuss different voting patterns among men and women, now more commonly refers to the different pay that men and women receive for doing similar jobs. While narrowed, the gap persists almost 35 years on, even as women have become better educated than men. Today, 78 cents is widely cited as what women earn for every dollar earned by men.</p> <p><em>Understanding the Gender Gap</em>, published in 1990, drew on extensive data, including the neglected records in the <a href="http://www.archives.gov/" target="_blank">National Archives</a>, to reveal a complex, sometimes surprising story about gender, work, and pay over the 19th and 20th centuries. Goldin considered factors as diverse as the shift from manufacturing to clerical and sales work for women; the unpaid, often undocumented work that married women performed in the home before they began joining the paid labor force in large numbers; and the history of legislation meant to protect female workers from exploitation. The persistence of social norms and the decline of fertility rates came into her analysis too.</p> <p>Progress on wages over the past two centuries, Goldin showed, has not been linear. The ratio of female to male earnings rose during the Industrial Revolution and again with the growth of clerical work in the late 19th and early 20th centuries. But it remained essentially flat from the 1950s to early 1980s, even as women entered the labor force in greater numbers and became more educated. The story she constructed defied easy summary, but, Goldin argued, it showed that economic progress has been a force for gender equality. Many factors—economic, historical, and societal—have contributed to its halting pace and to “the tenacity of gender differences in the workplace.”</p> <p>One of those factors is wage discrimination, “a difference in earnings between two groups that cannot be accounted for by differences in the average productive attributes of the groups, such as job experience, education, and tenure with a firm.” Goldin traced the emergence of such discrimination against women to white-collar companies between 1890 and 1940, when it grew even as the number of women in the workforce increased and the wage gap narrowed.</p> <p>“If the considerable difference in the earnings of males and females in manufacturing was largely due to rewards to strength, then the replacement of brain for brawn work should have evened starting salaries,” Goldin wrote, and it did, before diverging with time on the job since firms barred women from most jobs with long promotional ladders—and men from jobs with short ones. In manufacturing, such segregation occurred through differences in men’s and women’s physical strength. And because manufacturing jobs paid by the piece, they afforded less opportunity for wage discrimination than salaried jobs. In clerical occupations, women were penalized by being limited to jobs with lower salaries and no chance of promotion.</p> <p>The impact of such policies, Goldin wrote, “was to have consciously sex-segregated occupations.” That had much to do with the stability of the gender gap from the 1950s to the early 1980s, before women’s increased political power started to have an effect.</p> <p><strong>At the end of <em>Understanding the Gender Gap</em></strong>, Goldin voices optimism about the future. Today she thinks she sees how the gap can finally be closed—how the final chapter of the story can be written, as she put it in her talk to the AEA and a 2014 paper, “<a href="http://scholar.harvard.edu/goldin/publications/grand-gender-convergence-its-last-chapter" target="_blank">A Grand Gender Convergence: Its Last Chapter</a>.”</p> <p>Women get paid less today, Goldin says, in part because they are more likely than men to step away from jobs or take less time-consuming jobs (switching from a law firm to become corporate counsel, for instance). When they do, corporations financially punish those who spend less time working—so concluded a study she cowrote with Katz and <a href="http://www.chicagobooth.edu/faculty/directory/b/marianne-bertrand" target="_blank">Marianne Bertrand</a> of Chicago Booth looking at why earnings for male and female MBAs are similar at the beginnings of their careers but diverge over time.</p> <p>Some sectors of the economy, like science and technology, are ahead of others in narrowing the gap. Among pharmacists the hours-adjusted ratio of women’s earnings to men’s is 0.95, while in a few tech occupations it rises above 1. But the gap remains wide in the corporate and legal sectors, despite the fact that men and women have similar earnings at the outset of their careers in these fields.</p> <p>What accounts for the difference? Take pharmacists. Most are now employed by large companies that have adopted technology and streamlined processes. Thus every employee has equal access to the needed information about clients, and pharmacists can easily substitute for each other when one is away. There’s no outsized premium on working specific hours or long hours, and no penalty for working fewer—pay is linear with respect to hours worked. That evens the playing field for women, who “still do more in the home than men,” Goldin says.</p> <p>In business and law, by contrast, workers make poor substitutes for each other. Time pressure is intense, availability to clients and coworkers prized, and strong interpersonal relationships with clients crucial. Here the gender gap remains the greatest—and it grows with the number of years on the job. Goldin’s study with Katz and Bertrand found that after 10 to 16 years in the workforce, female University of Chicago MBAs were making 55 percent of their male counterparts’ earnings. Sixty percent of the difference, they concluded, came from career interruptions and working fewer hours.</p> <p>The gender gap will close, Goldin says, when employers structure their businesses to allow for flexible hours, substitutability of workers, and linear pay. Some industries and occupations will be slower than others. For a handful of jobs this won’t be possible—she cites “CEOs, trial lawyers, merger-and-acquisition bankers, surgeons, and the US secretary of state.” But she believes many more industries can embrace them than already do. “Women have demanded this type of temporal flexibility,” she says, but “more and more men are demanding it. … Not family, but work-life balance.”</p> <p><strong>Goldin and Katz share an office at the <a href="http://www.nber.org/" target="_blank">National Bureau of Economic Research</a></strong> (NBER), just beyond Harvard Square, where she directs the Development of the American Economy program. The space has a few cubicles for research assistants and an interior office for visiting NBER fellows that houses a bunch of stuffed animals. You enter through a childproof gate that keeps the couple’s golden retriever, Pika, from wandering.</p> <p>A first meeting with Goldin might include a lesson on how the retriever breeds came to be. She dotes on Pika, whom she has trained for obedience competitions. Occasionally she’ll take him out in the hallway and put him through his paces, all hand motions and gestures, no words. Katz jokes that he is Pika’s untrainer.</p> <p>Goldin’s curiosity is omnivorous. She’s an expert birdwatcher, an excellent gardener, and a skilled plumber; she also does her own taxes (as an economist she should be familiar with the current tax code, she says, plus “it’s really easy to do”). She doesn’t watch television, but she and Katz read to each other every night. Not long ago they reread the complete stories of <a href="https://www.goodreads.com/book/show/188572.The_Complete_Sherlock_Holmes?from_search=true" target="_blank">Sherlock Holmes</a>; a favorite is “<a href="http://www.gutenberg.org/files/1661/1661-h/1661-h.htm" target="_blank">A Scandal in Bohemia</a>,” where Holmes is outwitted by a woman. Last summer, they returned to Jane Austen’s 1815 novel <em><a href="https://www.goodreads.com/book/show/6969.Emma" target="_blank">Emma</a></em>. (Goldin doesn’t see many movies, but she’s quick to bring up that <em><a href="http://www.imdb.com/title/tt0112697/" target="_blank">Clueless</a></em> is based on the novel—”a fun movie.”)</p> <p>In Goldin’s 2006 seminar Women, Work, and the Family: Present and Past, students read the O. Henry short story “<a href="http://www.gutenberg.org/files/2776/2776-h/2776-h.htm" target="_blank">Springtime à la Carte</a>” (1906), centered on a young woman who is a freelance typist, lacking the skills to become a stenographer and “enter that bright galaxy of office talent,” and <em><a href="https://www.goodreads.com/book/show/387348.The_Group" target="_blank">The Group</a></em>, Mary McCarthy’s 1964 novel about eight young Vassar graduates’ lives after college, which later inspired <em><a href="http://www.hbo.com/sex-and-the-city#/" target="_blank">Sex and the City</a></em>. She also assigned readings from Betty Friedan’s <em><a href="https://www.goodreads.com/book/show/17573685-the-feminine-mystique?from_search=true" target="_blank">The Feminine Mystique</a></em> (1963). Such texts sit on her syllabi alongside more traditional economics texts like Becker’s <em><a href="https://www.goodreads.com/book/show/174237.A_Treatise_on_the_Family?ac=1" target="_blank">A Treatise on the Family</a></em> (1981), Francine Blau and Marianne Ferber, AM’46, PhD’56, on discrimination, and her own paper with Katz documenting the power of the pill.</p> <p>Goldin developed a love for literature, especially W. B. Yeats, at Cornell. It has persisted, and has influenced her economics work. Novelists “are not social scientists,” Katz notes, “but they’re acute observers of the world, and the interesting job for an economic historian is to figure out which of the observations have broader validity.” The voracious reader is known among economists as a gifted storyteller herself. “One of the things she’s very good at is how to construct a compelling narrative with your model and your data,” says <a href="https://sites.google.com/site/elisaolivieri/" target="_blank">Elisa Olivieri</a>, AM’11, who worked with Goldin as an undergraduate at Harvard and a research assistant at NBER. “Her papers, they’re thoughtful and rigorous, but also very readable.”</p> <p><strong>The pleasant kitchen at the NBER can be its own modest nexus of economic thought.</strong> Olivieri remembers being in the kitchen late one night, working on her senior thesis, when Goldin walked in. It turned out that the same task had kept both of them at the office late: Goldin was reviewing a draft of Olivieri’s paper.</p> <p>Now in her sixth year of graduate studies in economics at Chicago, Olivieri is still in close touch with Goldin. At a <a href="http://news.uchicago.edu/article/2013/06/11/robert-fogel-won-nobel-prize-economics-1926-2013" target="_blank">memorial service for Fogel</a> last year, she heard Goldin extol his dedication to his two families, at home and at school. “She might well have been talking about herself,” Olivieri says. “She has a lot of intellectual sons and daughters, but a lot of daughters in particular. She’s a pioneering example and follows through with being a truly mentoring person.” She keeps a photo of Goldin in her office and is on notice to send her dissertation draft to Goldin as soon as it’s finished.</p> <p>In December 2013, two months after Fogel’s memorial, the NBER held a conference in Goldin’s honor called Human Capital in History: The American Record (the <a href="http://www.press.uchicago.edu/ucp/books/book/chicago/H/bo18411047.html" target="_blank">papers were published</a> this November by the University of Chicago Press). “This was the first NBER conference I’d ever been at where there were lots of babies in the room,” says Boston University economist <a href="http://www.bu.edu/econ/people/faculty/margora/" target="_blank">Robert Margo</a>, who organized the event with two of Goldin’s former students, <a href="http://www.econ.ucla.edu/lboustan/" target="_blank">Leah Platt Boustan</a> and <a href="http://www.kellogg.northwestern.edu/faculty/directory/frydman_carola.aspx" target="_blank">Carola Frydman</a>. Boustan remembers Goldin saying, “as long as the baby is not asking questions that are better than mine, they are totally welcome.’” Boustan now has an infant of her own whom she recently took to an economics seminar. “I had to psych myself up for that,” she says. “If I hadn’t had someone like Claudia to tell me through example that it was OK, I would’ve felt like, ‘who am I to bring a baby here?’”</p> <p>Boustan’s reluctance may be exacerbated by the shortage of women in economics. A recent project of Goldin’s examined why the number of female economics majors has declined even as women now constitute the majority of college students. The difference in men’s and women’s math ability on entering college is negligible, if not in women’s favor, but nationwide there are three male econ majors for every female. Goldin says the data show that women are less likely to major in a subject when they don’t earn top grades in it. Economics tends to lose prospective women majors who get lower than As in a gateway course like Introduction to Economics, while men who get Bs and even Cs are less likely to be deterred.</p> <p>Writing in <a href="http://www.bloombergview.com/articles/2013-10-14/can-yellen-effect-attract-young-women-to-economics-" target="_blank"><em>Bloomberg View</em> in October 2013</a>, Goldin asked whether Janet Yellen’s appointment as Federal Reserve chair would draw more women into the field. It might, she said, but they will need more encouragement than a role model even of Yellen’s caliber. Another approach, she proposed, is to convince them of the subject’s usefulness beyond careers in finance and business—and of its appeal beyond mere usefulness. “Many young women,” she wrote, “don’t seem to understand that economics is also for those who have broad intellectual interests.”</p> <p>Shedding empirical light on a wide range of social mysteries drives Goldin. She’s still chasing clues and piecing together stories. She’s now at work, with Katz and former graduate student <a href="http://healthpolicy.fsi.stanford.edu/people/marcella_alsan" target="_blank">Marcella Alsan</a>, an assistant professor of medicine at Stanford, on infant mortality and the role of sewer systems in boosting the likelihood that infants would survive. One of the first sharp changes in those rates in the United States, she says, was in Massachusetts in the 1890s, reducing infant deaths from about one in seven to one in 10 to 20. Against other theories that the drop had to do with changes in the milk supply, she and her collaborators suspect the creation of a watershed and metropolitan water district. “Babies get bathed and touch water even if they’re breast-fed,” she says. “The pathogenic environment is passed on.” At first the three “went down the cow path” too, but now they’re looking for evidence in how towns’ mortality rates varied with their distances from the watershed and whether or not they belonged to the water district.</p> <p>Lower mortality rates in turn changed the workforce, improved health and longevity, and had a cascade of other effects on society. Between what she finds in the archives and the illumination afforded by the quantitative tools of economic analysis, Goldin thinks, she’ll soon have the answer.</p> </div> <div class="field field--name-field-reftopic field--type-entity-reference field--label-hidden field--item"><a href="/topics/economics-business" hreflang="en">Economics &amp; Business</a></div> <div class="field field--name-field-tags field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><a href="/tags/economics" hreflang="en">Economics</a></div> </div> <div class="field field--name-field-refuchicago field--type-entity-reference field--label-hidden field--items"> <div class="field--item"><a href="/graduate-alumni" hreflang="en">Graduate alumni</a></div> </div> <span class="a2a_kit a2a_kit_size_32 addtoany_list" data-a2a-url="https://mag.uchicago.edu/economics-business/delight-discovery" data-a2a-title="Delight in discovery"><a class="a2a_button_facebook"></a><a class="a2a_button_twitter"></a><a class="a2a_button_google_plus"></a><a class="a2a_button_print"></a><a class="a2a_dd addtoany_share_save" href="https://www.addtoany.com/share#url=https%3A%2F%2Fmag.uchicago.edu%2Feconomics-business%2Fdelight-discovery&amp;title=Delight%20in%20discovery"></a></span> Wed, 29 Oct 2014 17:33:03 +0000 rsmith 4042 at https://mag.uchicago.edu Ends and means https://mag.uchicago.edu/economics-business/ends-and-means <div class="field field--name-field-letter-box-story-image field--type-image field--label-hidden field--item"> <img src="/sites/default/files/1112_Fitzgerald_Ends-and-means.jpg" width="1600" height="743" alt="" typeof="foaf:Image" class="img-responsive" /> </div> <span><span lang="" typeof="schema:Person" property="schema:name" datatype="">Anonymous</span></span> <span>Tue, 11/01/2011 - 13:38</span> <div class="field field--name-field-caption field--type-text-long field--label-hidden field--item"><p>(Illustration by Harry Campbell)</p> </div> <div class="field field--name-field-refauthors field--type-entity-reference field--label-visually_hidden"> <div class="field--label sr-only">Author</div> <div class="field__items"> <div class="field--item"> <div about="/author/michael-fitzgerald-ab86"> <a href="/author/michael-fitzgerald-ab86"> <div class="field field--name-name field--type-string field--label-hidden field--item">Michael Fitzgerald, AB’86</div> </a> </div> </div> </div> </div> <div class="field field--name-field-refsource field--type-entity-reference field--label-hidden field--item"><a href="/publication-sources/university-chicago-magazine" hreflang="en">The University of Chicago Magazine</a></div> <div class="field field--name-field-issue field--type-text field--label-hidden field--item">Nov–Dec/11</div> <div class="field field--name-field-subhead field--type-text-long field--label-hidden field--item"><p>Microfinance was supposed to lead the poor out of poverty. Yet after a rash of borrower suicides in one Indian state, experts and governments question the industry’s success.</p> </div> <div class="field field--name-body field--type-text-with-summary field--label-hidden field--item"><p>In the fall of 2010, Shobha Srinivas replaced Nobel Peace Prize winner Muhammad Yunus as the face of microcredit, and the industry went from panacea for the poor to wolf at their door.</p> <p>A 30-year-old mother of two boys, Srinivas set herself on fire in part because she could not pay the interest on a $265 loan. She was one of more than 14,000 people in India’s heavily agricultural, drought-ridden Andhra Pradesh state who committed suicide between January and September 2010—and one of more than 70 between March and November that year who allegedly killed themselves because of aggressive debt collection by microcredit institutions.</p> <p>Helping the poor avoid predatory lending was the reason microfinance as an industry had been born. Yunus, a former economics professor in Bangladesh, wanted to help some poor families he knew avoid the local moneylender, and in 1976 he lent them the equivalent of $27. After a few years of expansion, he formally established the Grameen (rural or village) Bank. The Grameen model was to loan money to groups of five women, who proved more effective borrowers than men because they focused on family and business. The groups added an element of peer pressure—if one woman missed a payment, the other four couldn’t get loans until it was paid. Srinivas headed several of these groups.</p> <p>To lend money you have to have money, or access to it, and for many years foundations interested in microcredit—the making of small loans, on average less than $600—helped fund its lending. Grameen, which became self-sufficient in 1983, has lent and been repaid billions of dollars. It’s helped millions of Bangladeshis move above the dollar-a-day mark, and in 2006 Yunus and the bank jointly received the <a href="http://nobelpeaceprize.org/en_GB/laureates/laureates-2006/" target="_blank">Nobel Peace Prize</a>.</p> <p>Today microcredit, and more broadly microfinance, which adds savings and insurance to microcredit, are their own asset class. Total outstanding loans for the industry were $52.5 billion in 2010, and microlenders that could accept deposits held $31.9 billion. More than 92 million people received microloans averaging $590 in 2010, according to mixmarket.org, a clearinghouse for microfinance statistics. Microfinance even exists in well-developed economies like the United States. It has been touted as a solution for poverty. Yet studies of microfinance’s performance suggests more modest results.</p> <p>“It helps [poor people] inch along and provides a service that is good for the poor,” says Dean Karlan, MPP’97, MBA’97, professor of economics at Yale and author of <a href="http://www.goodreads.com/book/show/8713694-more-than-good-intentions" target="_blank"><em>More than Good Intentions: How a New Economics Is Helping to Solve Global Poverty</em></a> (Dutton Adult, 2011). Karlan’s research suggests that microfinance is not an economic development tool so much as a household stabilizer.</p> <p>Because microcredit encourages entrepreneurship at the same time that it emphasizes the empowerment of the poor, it appeals to both the political right and the left. But some academics have their doubts. “I am not a fan of microfinance,” says Chicago sociologist <a href="http://news.uchicago.edu/profile/richard-taub" target="_blank">Richard P. Taub</a>. He acknowledges that the practice makes some people’s lives better. But microfinance is not a good vehicle for economic development, Taub says, and the attention it gets allows governments to avoid investing in infrastructure and education, which would be of more help to the poor.</p> <p>Taub’s views are directly opposed to those of a student he advised on a dissertation, Vikram Akula, PhD’04. Akula founded Swayam Krishi Sangam (self-work or self-help society) Microfinance in 1997, while he was at Chicago. The firm, known as <a href="http://www.sksindia.com/" target="_blank">SKS</a>, has become India’s largest and perhaps most controversial microfinance institution.</p> <p>Although Grameen had made inroads with the upper and middle poor, Akula believed that microfinance could improve the lives of even India’s very poor by freeing them from moneylenders, who might charge as much as 120 percent interest. Akula modeled his firm after Grameen, adopting its five-woman lending unit, but he believed that the only way for a microfinance firm to gain the scale it needed to help the very poor was to operate as a for-profit company. Akula also came up with a new approach to train loan officers, a simple, easy-to-replicate method modeled on McDonald’s Hamburger University.</p> <p>The for-profit model wasn’t unique to SKS, but because it involved profiting from the poor, SKS and other for-profit firms raised controversy, as did its acceptance of venture capital, especially as the company began growing rapidly. The firm zoomed from 276 branches and 2,381 employees in March 2007 to 2,379 branches and 22,733 employees in March 2011 (down a bit from its peak in September 2010). It typically loans between $44 and $260, at interest rates averaging about 24.55 percent annually. Since its inception SKS has made more than $2 billion in loans. In 2007 and 2008 profits and revenue grew more than 200 percent.</p> <p>In 2006, the year Yunus and Grameen Bank won the Nobel, SKS’s Akula made <em>Time</em> magazine’s 2006 list of the world’s most influential people. He had meetings with Bill and Melinda Gates and Warren Buffett, and in 2005 he had squired Rahul Gandhi around his operations. In July 2010 SKS had a spectacular initial public offering, in which the firm raised the equivalent of $350 million (Mexico’s Banco Compartamos was the first microfinance institution to go public in 2007). Akula reportedly cashed in about $10 million in shares. Earning millions was his reward for successful innovation, but it also made him a target. In news interviews Yunus, for one, has criticized the idea of people getting rich off the poor, and he debated Akula at Bill Clinton’s Global Initiative last year.</p> <p>Akula didn’t respond to questions for this article. But in his 2010 memoir <a href="http://www.goodreads.com/book/show/8411695-a-fistful-of-rice" target="_blank"><em>A Fistful of Rice</em></a> (Harvard Business Review Press), written before SKS went public, he said repeatedly that his for-profit model helps both lender and borrower.</p> <p>The book ends with Akula’s visit to a mud-brick store in a village two hours from Hyderabad, owned by a woman named Yellamma, a member of India’s untouchable caste. She started her store with an $80 loan from SKS, and its success “gives her a way to rise above her status, which used to be an impossibility for a woman in her position,” Akula writes. He takes off his sandals when invited inside her home. He is astonished to find that she has a color television—Yellamma is successful, but she still nets only a few dollars a week.</p> <p>The TV, it turns out, is courtesy of her son, who now works at SKS and has left poverty behind. The firm tries to hire from borrowers’ families, although to prevent conflicts of interest, relatives work in different regions from their families.</p> <p>“Am I not doing well?” Yellamma asks Akula.</p> <p>&nbsp;</p> <p><strong>Yellamma’s narrative is part of the mythos</strong> of microcredit and microfinance, along with Grameen Telecom’s famous phone ladies, who used their loans to buy cell phones and then rented time to other villagers in Bangladesh, earning, in the early days of the program, three times the national average.</p> <p>These stories are qualified successes. Yellamma is doing better, but still scraping along—she couldn’t buy a TV on her own. The phone ladies have been overtaken by technological progress; as cell phones have spread among poor Bangladeshis, the phone ladies now struggle.</p> <p>The real story of these women—around whom successful microcredit is usually built—and occasional men is not that they get rich or even comfortable, but they get better nourishment and usually move beyond lives of bare subsistence. One recent study showed that microfinance in Bangladesh had raised income levels to about a $1.25 a day.</p> <p>But all that was before Shobha Srinivas set herself on fire and her husband died from the burns he got trying to save her, leaving their children orphaned. An early target of microfinance firms, Andhra Pradesh, in southern India, is one of the country’s poorest states. Its capital is Hyderabad, but many of the state’s 82 million residents, who speak a minority Indian dialect, Tegulu, are engaged in subsistence agriculture. Srinivas’s suicide and dozens of others were blamed on aggressive repayment tactics. Lenders in the region allegedly threatened borrowers with public humiliation, forcing daughters into prostitution, forcing spouses to become bonded laborers, and taking household goods. The microlenders are also accused of lax lending practices; many of the victims had multiple microloans, sometimes from both established microcredit firms and from traditional moneylenders. Akula’s SKS had 17 clients named on a list of 54 microfinance-related suicides compiled by the Society for Elimination of Rural Poverty. He told <a href="http://www.bloomberg.com/news/2010-12-28/suicides-among-borrowers-in-india-show-how-men-made-a-mess-of-microcredit.html" target="_blank">Bloomberg News</a> that none of its clients were behind on their loans.</p> <p>Regardless, the general public’s perception of the microfinance industry seemed to shift after the media’s coverage of the suicides, says Jacob A. Haar, AB’02, AM’04. Haar is cofounder and managing director of <a href="http://www.minlam.com/">Minlam Asset Management</a> in New York, which manages a fund of less than $100 million in assets that lends money to microfinance companies. Although his firm has not made investments in India—managers were concerned about the rapid growth—Haar’s wife is from Andhra Pradesh. “It’s astonishing,” he says, “how quickly many perceptions have changed there of microfinance.”</p> <p>The most visible change in perception is from the state’s government, which in October 2010 began preventing firms from collecting payments and required government approval for borrowers to receive more than one microcredit loan. The “AP law,” as it became known, drove loan repayment rates down as low as 10 percent.</p> <p>The situation seemed bad enough in Andhra Pradesh that the <em>New York Times</em> <a href="http://www.nytimes.com/2010/11/18/world/asia/18micro.html?pagewanted=all" target="_blank">wrote in November 2010</a>, four months after SKS went public, that “India’s rapidly growing private microcredit industry faces imminent collapse.” Indeed, India’s second-largest microfinance firm almost shut down. SKS lost money the first two quarters of 2011 and has accelerated a shift into other services and into markets outside of Andhra Pradesh, which makes up about a quarter of its loan portfolio.</p> <p>That shift had been on Akula’s mind for several years, says Lisa G. Thomas, MBA’06, cofounder of the <a href="http://www.chicagomicrofinance.com/" target="_blank">Chicago Microfinance Conference</a>. Thomas, vice president of capacity building and operations at CapitalPlus Exchange in Chicago, recalls that in speeches at the conference in May 2009, Akula discussed expanding his strategy, distributing cell phones, solar lamps, and the like through SKS’s branch network to boost revenues, increase market share, and provide products and services to the poor at a lower cost. “He was thinking of alternative revenue sources four or five years ago,” Thomas says, “and it may now be these strategies that save some of these MFIs [microfinance institutions].”</p> <p>The press coverage suggesting that microfinance caused suicides bothers Karlan, the Yale economist. Karlan, who studies the economics of poverty, says the microcredit industry has been scapegoated unjustly in India. “It’s just the natural flow of things to get hyped,” he says, “and whenever something’s hyped, odds are it’s overhyped. Likewise, we’re seeing the negatives overhyped.”</p> <p>The industry’s supporters were wrong when they claimed that microfinance would solve poverty, Karlan says, and its detractors are wrong to say that it causes suicides. Both analyses are “plagued with selection bias,” he says, referring to a phenomenon that happens when statistical samples are distorted. In the case of the Andhra Pradesh suicides, perhaps there would have been higher suicide rates if microfinance had not been widely available, or perhaps other forms of debt or despair were at the root of the deaths.</p> <p>Akula might remind critics that in the recent past SKS has been viewed as dangerous for helping people, not for killing them. After local gangsters spread rumors that SKS was a secret Christian organization trying to convert Indians, he writes in his book, the firm survived a fatwa against it in Nizamabad, Andhra Pradesh, leaving the area and writing off $250,000 in loans. In rural India guerrillas threatened an SKS loan officer. In response, several female customers went to the guerrillas’ camp to deliver a message: you have to go through us to get to him.</p> <p>&nbsp;</p> <p><strong>Before Akula embarked on a PhD at Chicago in 1996,</strong> SKS did not exist. But he was already considering something like it. “In reality, I didn’t much care about getting a doctorate; I just wanted to have time to plot my move into full-time microfinance,” he writes in<em> A Fistful of Rice</em>. He probably spent as much time in Hyderabad as in Hyde Park.</p> <p><a href="http://news.uchicago.edu/profile/gary-herrigel" target="_blank">Gary Herrigel</a>, who chaired Akula’s dissertation committee, says that after he finished his classes, “he disappeared as a kind of good but unfocused student. And then four years later he came back with this razor-sharp clear idea of what he wanted to do based on having been very politically and entrepreneurially successful in real life.”</p> <p>Herrigel and Taub both note that it’s unusual for a graduate student to write a dissertation about the business he runs, but then, Herrigel notes, it’s unusual for political-science graduate students to “be running businesses that involve issues of general significance for the study of the political economy of development.”</p> <p>When Akula started SKS, it was funded by donations. In Chicago’s student services office, Michelle Obama advised him on a grant proposal to Echoing Green Foundation back when her husband was a candidate for the Illinois State Senate. Yet for Akula, the traditional nonprofit model of microfinance had a fundamental problem: raising enough money to make a loan to every poor person who wanted one. His solution: SKS would be a for-profit firm.</p> <p>By the time he published <em>A Fistful of Rice</em>, he had refined the message: “The only place where MFIs can get enough capital to meet their lending needs is through commercial markets. And the only way to get commercial capital is by offering high profits in return. Investors won’t invest unless they see a very large upside potential, because they see microfinance as risky—as unsecured loans to poor women who have no credit history and who are often illiterate.”</p> <p>Microlending, he points out, is costly not only because of the perceived risk of lending to the very poor but also because it is labor intensive. Borrowers live in rural areas. They tend not to have telephones or Internet access, and they usually cannot travel far enough to reach a bank. Loans are made and must be serviced in person, by traveling to villages every week.</p> <p>If SKS could get access to commercial markets, Akula thought, his firm would reach “Google territory”—that is, making money through just a few pennies in profits from each of the millions of customers. He set up SKS to grow as rapidly as possible, eventually putting the firm in position to strike distribution deals with a variety of companies trying to gain access to the poor. As established by the late C. K. Prahalad in <a href="http://www.goodreads.com/book/show/64238.The_Fortune_at_the_Bottom_of_the_Pyramid" target="_blank"><em>The Fortune at the Bottom of the Pyramid</em></a> (Prentice Hall, 2004), the poor in India and elsewhere represent gigantic growth markets for basic consumer goods, if companies can figure out how to distribute and market cost-effectively. But it is difficult to service the very poor, people who live on less than $1.25 a day.</p> <p>In his dissertation, Akula notes that SKS’s initial branch, in Narayankhed, Andhra Pradesh, was better at serving the very poor, making 97 to 98 percent of new loans to them, than its later branches, which fell off to about 90 percent. Akula argues that as microfinance firms grow, they face pressure from donors to become financially self-sufficient, which forces them to stop lending to those in extreme poverty. SKS ran into this problem as a nonprofit, prompting him to write: “As SKS scales, there is a greater chance that the key characteristics that kept SKS focused on the very poor will be lost.” To prevent that from happening, he wrote, SKS would train staff to focus on issues that affect this group, offering bonuses when at least 90 percent of new clients met an SKS-developed measure of very poor.</p> <p>Although his dissertation involved writing about himself, those who’ve heard him talk over the years say he consistently articulated that goal. When Akula spoke at events like the Chicago Microfinance Conference, Haar says, “he always talked about the poor and [microfinance’s] impact on them.”</p> <p>&nbsp;</p> <p><strong>In January 2011 a <em>New York Times</em> story <a href="http://www.nytimes.com/2011/01/06/business/global/06micro.html?pagewanted=all" target="_blank">charged</a></strong> that multiple crises in the industry meant that “microcredit is losing its halo in many developing countries.” The suicides, in fact, were far from the first scandal of microfinance. In 1994 employees at El Salvador’s FINCA were found to have embezzled funds. In 1999 and 2000 excessive lending in Bolivia caused severe debt levels, and protesters waged hunger strikes demanding debt forgiveness. Before Nicaragua’s 2009 presidential election, Daniel Ortega supported a <em>no pago</em> (don’t pay) movement, which led to protests against interest rates considered too high (18 percent). The movement caused Nicaragua’s largest microfinance firm, Banco del Exito (Banex), to liquidate last year.</p> <p>Yunus, the father of microfinance, was forced out as managing director of Grameen Bank this past May, ostensibly because he was past Bangladesh’s forced retirement age and because, back in 1999, the Bangladeshi central bank did not give approval for him to hold the position. But in late 2010 the prime minister had accused microfinance institutions of “sucking blood from the poor,” ordering an investigation into whether Grameen evaded paying taxes on a fund transfer to Norway (the Norwegian government had cleared them). The investigation didn’t find anything. Yunus’s ouster was widely seen as an act of political retribution because he had called out Bangladeshi politicians for corruption and briefly flirted with the idea of setting up a political party.</p> <p>In general, problems in microfinance “are pretty insulated to the specific country,” says Simone Balch, AB’97, director of investor development at <a href="http://www.dwmarkets.com/">Developing World Markets</a>, an investment firm in Stamford, Connecticut, with $850 million in assets, which has invested in 150 microfinance firms in more than 40 countries, including India. The <em>no pago</em> movement in Nicaragua, for instance, did not spread to its Central American neighbors.</p> <p>Nicaragua and Bolivia and even Bangladesh are relatively small countries. India is not, and the deaths there have already affected microfinance elsewhere. Regulations put in place by India’s national government (less onerous to microfinance firms than those of Andhra Pradesh) “could show up in other places,” says Lisa Thomas. Jacob Haar predicts that the situation in India will lead to positive reforms. One new initiative came from the United Nations Principles for Responsible Investment, which created Principles for Investors in Inclusive Finance, a set of guidelines for microfinance investors. Signatories included Developing World Markets and Minlam.</p> <p>Yet the recent events have also created operational challenges. “There’s a lot more questioning as to whether or not microfinance actually works,” says Tom Derdak, PhD’85, who founded and directs <a href="http://magazine.uchicago.edu/1006/arts_sciences/aid-for-africa.shtml">Global Alliance for Africa</a>. The organization invests about $100,000 a year in microcredit and support services in African countries.</p> <p>So far, investments in microlending don’t seem affected. If the market for microfinance were going to fall apart, it should show up first at small operations like Derdak’s. “In terms of our own program,” he says, “our own lending and our own client base, it hasn’t hurt.”</p> <p>Whether Akula’s legacy remains unscathed is less clear. Reports in late September said he might be forced out of his position at SKS. Yet what he did there was groundbreaking. “The story of SKS is still remarkable,” says Haar. “The type of growth, the pace of growth, it’s remarkable.” In the end, Haar predicts, Akula will be proven right about the for-profit model; it can, they both believe, help billions of people out of poverty.</p> </div> <div class="field field--name-field-reftopic field--type-entity-reference field--label-hidden field--item"><a href="/topics/economics-business" hreflang="en">Economics &amp; Business</a></div> <span class="a2a_kit a2a_kit_size_32 addtoany_list" data-a2a-url="https://mag.uchicago.edu/economics-business/ends-and-means" data-a2a-title="Ends and means"><a class="a2a_button_facebook"></a><a class="a2a_button_twitter"></a><a class="a2a_button_google_plus"></a><a class="a2a_button_print"></a><a class="a2a_dd addtoany_share_save" href="https://www.addtoany.com/share#url=https%3A%2F%2Fmag.uchicago.edu%2Feconomics-business%2Fends-and-means&amp;title=Ends%20and%20means"></a></span> Tue, 01 Nov 2011 18:38:21 +0000 Anonymous 433 at https://mag.uchicago.edu