Our Rio de Janeiro correspondent, Mac Margolis, delves into a new microfinance study, and wonders whether the much-lauded sector is about as efficacious as a subprime CDO and as bubbly as a Pets.com equity option. --BWS

The international financial crisis has destroyed many certainties, but one of the touted survivors is the old saw that small is beautiful. Sure, no one is flogging mansions to paupers anymore. But microfinance is still flourishing, and even expanding. Ever since Bangladeshi economist Muhammad Yunus started handing out small loans to the poor in 1974, the idea that a little credit can help peasants and simple villagers climb out of poverty has swept the map. Civic groups, the World Bank, even commercial lenders have gotten into the act, capturing millions of barefoot clients across the developing world. Today microfinance is a global growth industry. It reaped Yunus the Nobel prize. Even the developed world is catching on. Grameen Bank, the Bangladesh-based microlender Yunus founded, opened a branch in Queens, New York, last year and plans to unveil another in Omaha, Nebraska. Take that, Citicorp.

But hold that confetti. Two U.S. economists--David Roodman, of the Center for Global Development, and Jonathan Morduch, of New York University--recently reran the numbers on microfinance’s heralded miracles and came away with a much murkier picture. After reviewing seminal studies on microcredit in Bangladesh, they concluded in a working paper that while microcredit is not hurting people, there is also no hard evidence that it is helping them much.

Since it emerged in the 1970s, the idea that the poor, with no equity but their own gumption, could borrow their way to prosperity has had its skeptics, as we noted in these pages a couple of years ago. But Grameen’s boosters were undaunted. They pointed to a number of high-powered studies showing impressive poverty reduction in even the most wretched places. Yunus’s claim "that five percent of Grameen borrowers get out of poverty every year” became the movement’s mantra. What Roodman and Morduch have done is to retrieve these same studies and put them under the looking glass.

Their paper is heavy going, stuffed with econometric arcana (“homoskedasticity”, “Fuzzy Regression Discontinuity”) and mathematical formulae that readers should not try at home. Still the conclusions are plain enough. Microfinance may help some lenders through hard times, tiding them over in lean periods, but the studies that show microcredit is a market-based tool to help the poor hoist themselves out of want are based on data that are hard to verify and, in some cases, flawed. If prosperity and lending often go together, they noted, it is nearly impossible to say which causes which. "Strikingly," write Roodman and Morduch, “30 years into the microfinance movement we have little solid evidence that it improves the lives of clients in measurable ways.” That's an unfortunate conclusion for a sector that now totals $25 billion worldwide, according to Deutsche Bank, with another $1.5 billion in new microloans every year; if current growth continues, the market will increase tenfold by 2015. Could microfinance be the next bubble?