exit, voice, and vouchers: using vouchers to train microentrepreneurs––observations from the...

World Development Vol. 32, No. 4, pp. 713–724, 2004� 2004 Elsevier Ltd. All rights reserved

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lddev.2003.10.006
doi:10.1016/j.worwww.elsevier.com/locate/worlddev
Exit, Voice, and Vouchers: Using Vouchers to Train

Microentrepreneurs––Observations from

the Paraguayan Voucher Scheme

PHILIPP H. LEPENIES *KfW Bankengruppe, Frankfurt, Germany

Summary. — The use of vouchers is increasingly advocated in development practice. Compared tothe vast existing literature on microfinance, however, research on voucher projects is still scarce.This paper examines the training voucher scheme in Paraguay. By applying the theory of exit andvoice to this case and to voucher systems in general, a theoretical framework is provided thatidentifies the advantages and limitations of training voucher schemes. It will be shown that vouchersystems cannot solve the information problems inherent in markets and that not all microentre-preneurs benefit from voucher schemes in the same way. The concepts of ‘‘voice ex-ante’’ and‘‘voice ex-post’’ as necessary ingredients of voucher schemes are introduced.� 2004 Elsevier Ltd. All rights reserved.

Key words — microentrepreneurs, voucher projects, training, information asymmetries, markets,

Paraguay

*The opinions expressed in this article are solely thoseof the author and do not reflect the views of KfW

Bankengruppe. Final revision accepted: 30 October

2003.

1. INTRODUCTION

Vouchers are an instrument to stimulate theprivate provision of goods and services.Voucher users choose for themselves what goodor service they want from whom––leaving it upto the mechanism of supply and demand toensure that quality standards are met. As aresult of competition, ideally only those pro-viders of goods and services survive that satisfythe preferences of demand.In recent years, voucher schemes have gained

prominence in development theory and prac-tice. Since vouchers enhance the functioning ofcompetitive markets, they fit neatly into themarket-friendly policy direction of the lastdecade. What is more, voucher projects areespecially attractive to donors since they seemto guarantee that aid-funded spending willreach the target group directly and that sup-pliers are automatically forced to take note ofthe preferences and needs of market demand.A voucher system was introduced in Para-

guay in 1995. Its purpose was the developmentof a whole new market––the market for mic-roenterprise training courses. Within this sys-tem, any microentrepreneur could pay for thetraining courses of his or her choice with

713

vouchers. An analysis of the scheme can thusillustrate how a market created by vouchersand then left to its own devices actually func-tioned. In Paraguay, the vast majority ofvoucher users were female and the courseschosen most often were on cooking, hairdress-ing, and cosmetology. At first glance, all thiscould be merely a coincidence. In this paper,however, I will show that it is due rather to thenature of voucher systems themselves thatfemale entrepreneurs with little professionalexperience interested in basic courses in hair-dressing and cooking are best catered for inmicroentrepreneur training voucher schemes,as opposed to more experienced microentre-preneurs. I reach this conclusion by applyingAlbert O. Hirschman’s theory of exit and voiceto voucher schemes and by emphasizing therole that information plays in the functioningof the market for microentrepreneur training.As will become clear, voucher schemes arecharacterized by ‘‘exit.’’ Yet, the free exit by

WORLD DEVELOPMENT714

voucher users is easily hindered, as was the casein Paraguay. At the same time, ‘‘exit’’ providesonly very little informational feedback to pro-viders of training courses. What is more,voucher schemes have often neglected to insti-tutionalize the major mechanism that allowsvoucher users to articulate their preferencesdirectly, i.e. through ‘‘voice.’’ This has impli-cations on how a market for training willdevelop.The remaining article is divided into three

sections. Section 2 outlines a theoreticalframework for the analysis of voucher projects.This framework combines the ‘‘classical’’ the-ory on vouchers by Friedman with argumentsset forth within Albert O. Hirschman’s exit–voice approach, taking the vital role thatinformation plays in the functioning ofvoucher-based markets into consideration.Section 3 describes the functioning and evolu-tion of the voucher scheme in Paraguay. InSection 4, the observations made are explainedby applying and enlarging the theoreticalframework. As the resulting analysis is in manyparts valid for any voucher training scheme,both the general limitations and benefits oftraining voucher schemes will become clear.Indications for future research will also begiven.The data on which this article is based stem

from two sources. The author undertookextensive fieldwork in Paraguay in the spring of2000 (Lepenies, 2002), which consisted of con-ducting nonrandom, qualitative interviews with50 participating microentrepreneurs. In addi-tion, the author participated in an internshipwithin the project administration and con-ducted interviews with politicians, administra-tors, and directors of various training institutesduring supervisory visits. The qualitative dataobtained during the fieldwork were comple-mented by the quantitative information fromthe computer database of the voucher distri-bution office in the Paraguayan capital As-unci�on, which holds essential data on allvoucher users.

2. THE THEORY BEHIND VOUCHERS

(a) The renaissance of microentrepreneurtraining projects

Microentrepreneurs as the backbone of mostdeveloping economies have long since becomethe primary target group of development

interventions. Throughout most of the lastdecade, however, the provision of financialservices for microentrepreneurs played a dom-inant role. These microfinance projects wereoften created in opposition to the highly inef-ficient ‘‘integrated’’ enterprise promotion mea-sures of the 1960s and 1970s that usuallycombined the provision of subsidized creditwith obligatory training courses. The integratedprojects often lacked acceptance, as they failedto take into account the real preferences of thetarget group.Despite the euphoria of the ‘‘microfinance

revolution,’’ however, recent evidence suggeststhat (micro-)finance alone does not automati-cally lead to the desired developmental effect ofpromoting entrepreneurs (Gulli & Berger, 1999;Hulme & Mosley, 1996; Johnson & Rogaly,1997; Mosley & Hulme, 1998; Rogaly, 1996;Wright, 1999). A clear obstacle to enterprisegrowth is not only lack of capital, but ratherlack of occupational skill. Therefore, projectsthat provide training courses for microentre-preneurs are experiencing a recent renaissanceunder the heading of ‘‘BDS,’’ i.e. ‘‘businessdevelopment services.’’ (Gibson, 1997; Gold-mark, 1999), that explicitly try to compensatefor the developmental shortcomings of micro-finance projects (Dawson, 1997). This newapproach to microenterprise training projectsdiffers however from the earlier ‘‘integrated’’projects, as it is characterized by a positive viewof competitive markets and of private-sectorservice provision. Instead of distorting com-petitive markets, BDS projects attempt to laythe foundations that will make markets workby themselves (Tanburn, 2002). As with recentdevelopment theory (as expressed in the WorldBank’s World Development Report, 1997,1999, 2002), BDS projects are influenced by theNew Institutional Economics and attempt toovercome problems of information through thedesign of favorable institutional arrangements.At the same time, these new projects also reflectthe World Bank’s recent approach of ‘‘Output-Based Aid,’’ which highlights the need to findmechanisms to ensure efficient service deliveryto the poor without having to restore old pol-icies of merely financing the (often inefficient)suppliers of (often poor) services. As part ofthis approach, the use of vouchers is frequentlyadvocated (Brook & Smith, 2001).The Paraguayan training voucher scheme

was one of the first to be set up in line with thenew BDS philosophy. In recent years, similarvoucher schemes have sprung up, namely in

EXIT, VOICE AND VOUCHERS 715

South America, to a much lesser extent also inAsia, Africa and Eastern Europe. A series ofcase studies have been produced by USAID-funded research within the MicroenterpriseBest Practices project. 1 Findings have beencondensed into a paper on lessons learnt(Goldmark & Fitzgerald, 2001), into a guide-line that devises design options for future BDS-voucher projects (Fitzgerald & Goldmark,2001), as well as into a paper introducing pos-sible performance indicators for trainingvoucher projects (Derham, Fitzgerald, &Goldmark, 2001). Some of the relevant con-clusions of this literature will be dealt with inthe latter part of the paper.The Paraguayan voucher scheme aimed to

create a competitive market for microentre-preneur training courses. It closely approxi-mates the ‘‘classical’’ ideas on vouchersproposed by Friedman as early as the 1960s. Atthe same time, however, Friedman’s conceptwas enlarged, as the project also intended totake the information problems inherent inmarkets into account.

(b) Vouchers and the role of information

In ‘‘Capitalism and Freedom,’’ Friedman(1962) advocated the use of vouchers in orderto enhance competition between primaryschools. In the case of schooling, the marketmechanism needed to be stimulated in order topromote more efficient educational services. Inhis view, parents should be given free vouchers,with which they could choose and pay for anyschool they considered best for their children.Competition between the different schoolswould then arise and, since parents would havethe opportunity to change schools wheneverthey deemed it necessary, only high-qualityschools would survive. Friedman argues thatstate interference in the market should be lim-ited to setting the minimal educational stan-dards of schools and to the funding of voucherschemes. As Friedman put it, vouchers con-tribute to the ‘‘development’’ of a market.The case of vocational training is more

complex. Training is a ‘‘merit good’’ (Mus-grave, 1959). It is provided by the private sec-tor, although not in the quantities desirable,which then often requires state intervention. Atthe same time, a training course is an ‘‘experi-ence good’’ (Nelson, 1970), meaning that itsquality can only be assessed after completion ofthe course. Since it would be impossible toallow clients to pay for a course only once they

have been satisfactorily assured of its quality,prices are charged up front. Clients doubtingthe quality have an incentive to pay as little aspossible, which makes training providers mini-mize their investment in the courses (Schor &Halty, 1999). This in turn will affect the qualityof training. ‘‘Information deficits’’––the factthat providers are not sure what entrepreneurswould pay for the courses nor what their realpreferences are, as well as the fact that mic-roentrepreneurs have no reliable informationon courses or providers––give rise to adverseselection. Following the arguments set forth byAkerlof (1970), the uncertainty about qualityand the prevalence of low-quality courses caneven lead to the total disappearance of thetraining market. The heart of the problem is thelack of information: information is lacking onboth the demand and the supply side. If theproblems are to be overcome, information hasto be effectively provided. The BDS-approachto voucher projects has rightly identified thisand tries to tackle the issue through the insti-tutionalized provision of information within itsprojects. BDS authors state that the provisionof information is ‘‘a critical element of suc-cessful market development’’ (Goldmark &Fitzgerald, 2001, p. 7). It enables voucher usersto make ‘‘intelligent choices’’ between provid-ers (Fitzgerald et al., 2001, p. 23) and forcessuppliers to adapt to the pressures of demandand competition. In other words, informationprovision is the key to facilitate the desired‘‘classical’’ workings of a voucher scheme.

(c) Information and vouchers continued:exit and voice

The idea that the functioning of vouchersystems might be linked to the optimal provi-sion of information is not new. Albert O. Hir-schman has theorized extensively on thisspecific aspect and it is thus helpful to brieflysummarize his thoughts.To ensure their own survival, providers of

services in a voucher-based market are obligedto adapt to client needs. By choosing betweendifferent providers, clients give vital informa-tional feedback. They express their ‘‘discon-tent’’ with lack of quality by opting for acompeting provider. This is the basic mecha-nism at the heart of any voucher scheme.In his theory of ‘‘exit’’ and ‘‘voice,’’ Hirsch-

man analyzed possible reactions to disap-pointment for various institutional settings(Hirschman, 1970). He contrasted ‘‘exit’’ (i.e.,


clients who simply change providers of goodsand services when disappointed with theirquality, as, for instance, in voucher schemes)with ‘‘voice’’ (i.e., the verbal articulation ofdisappointment in the form of protests, dem-onstrations, and so forth). With this dichot-omy, Hirschman aimed to explain how differentinstitutions could ideally be given the necessaryinformational feedback that would enable themto enhance the quality of their services oncetheir standards did not live up to the client’sexpectations. Within this concept, the analysisof the optimal mix of exit and voice for existingas well as new institutions is crucial. Generally,an institution can seldom rely exclusively on thefeedback provided by either exit or voice. ForHirschman, the sole reliance on exit and thelack of voice is a key to understanding whysuboptimal institutional performance can per-sist over time. This was the case with theNigerian railroad that was evaluated by Hir-schman during a World Bank assignment in the1960s. Here customers dissatisfied with theservices ‘‘exited’’ to transport by road withoutrevealing their reasons to the rail authorities(Hirschman, 1995a, further distinctions inHirschman, 1981b, 1981c, 1995b).Where do vouchers fit into this? Hirschman

himself has made the connection between histheory and Friedman’s original voucher model.According to Hirschman, the Friedmanvoucher approach is ‘‘a near perfect example ofthe economist’s bias in favor of exit and againstvoice’’ (Hirschman, 1970, p. 17). To underlinethis, consider the following Friedman quote:

‘‘Parents could express their views about schools di-rectly by withdrawing their children from one schooland sending them to another’’

(Friedman, 1962, p. 91; Hirschman, 1970, p. 16,my emphasis). Apparently, Friedman considers‘‘exit’’ to be a ‘‘direct’’ articulation of disap-pointment. The changing of providers is adirect and sufficient expression of views, which,in the theory of atomistic markets, leads to theautomatic improvement of services. In thetheory of exit and voice, however, the effectiveuse of either one of these two mechanismsdepends on whether clients can judge thequality of services or goods as experts would.As with the New Institutional Economics’assumption of asymmetrically distributedinformation, Hirschman assumes that theknowledge of the quality of goods is normallydisproportionally distributed among the pro-

ducers and the users of the good. When aproduct does not yet exist in the market anddemand exists prior to supply, potential clientshave to articulate to potential providers what itis they want. In this case, voice is the idealmechanism for closing this information gap:

Demand for a service has risen in advance of realknowledge of how to satisfy it; . . .the institutionalquestion is here not one of protecting the consumer,but of educating the producer, of providing him withas much information as possible about his perfor-mance. In such situations, the contribution of voicecan clearly be of the greatest importance, simply be-cause the information it supplies is rich and detailedas compared to the bareness and blankness of silentexit (Hirschman, 1981a, p. 220, my emphasis).

Generally, not all types of markets willfunction with vouchers. According to Hirsch-man (1986, p. 88), vouchers work best underthe following conditions:

(1) when there are widespread differences in taste thatare recognized as legitimate; (2) when people are wellinformed about the quality of the goods and servicesthey want and can easily compare and evaluate them;(3) when purchases are relatively small in relation toincome and recurrent, so that buyers can learn fromexperience and easily switch from one brand and sup-plier to another; and (4) when there are many compet-ing suppliers.

In the case of pure consumption goods, theseprerequisites are easily met. In the case of morecomplex goods and services, whose quality canbe judged only rudimentarily by the consumers(as in the case of training courses), this is muchmore difficult.

Here, the buyers of the services are often ill-informedabout quality, there are few suppliers and comparisonshopping is complicated and even impossible in thecase of some very important decisions (Hirschman,1986, p. 88).

Therefore, ‘‘the development of voice con-stitutes an important alternative strategy forassuring and maintaining product quality’’(Hirschman, 1986, p. 89).Hirschman’s analysis shows that voice is a

necessary ingredient in voucher schemeswhenever consumers have to ‘‘educate theproducer’’ on what they want. This clearlyapplies to microentrepreneur training courseswhere ‘‘lack of information’’ was identified asthe main reason for their nonexistence.Whether voice was given enough room in Par-


aguay will be seen in the remainder of thepaper.

3. THE VOUCHER PROJECTIN PARAGUAY

Before the start of the voucher scheme, anestimated 300,000 Paraguayans, almost two-thirds of the total active urban population,were earning their living as microentrepreneurs(Goldmark, Berte, & Campos, 1997). In 1995,funds of the Inter-American DevelopmentBank (IDB) were directed into a ‘‘training ini-tiative’’ that was to supply training courses tomicroentrepreneurs. This gave birth to thetraining voucher scheme.With vouchers, microentrepreneurs were able

to pay for courses of their choice offered by arange of certified private and public trainingproviders. Explicit use was made of existingtraining institutions that had had no coursesspecifically for microentrepreneurs on offeruntil then and that had to adapt their coursecontent and schedules. Competition among thetraining providers was relied upon to ensurethat only high-quality courses survived. Thenumber of vouchers available to each personannually was limited to six (Schor & Alberti,1996, 1999).Vouchers were officially printed under the

control of the Paraguayan Ministry of Justiceand Labor. Within this ministry, a subinstitu-tion certified the training institutes, inspectedand supervised them, and approved the cour-ses. A maximum of 25 participants wereallowed in one course.Vouchers were handed out by a voucher

distribution office situated in the capital, As-unci�on, and the border town of Ciudad delEste. Microentrepreneurs who wanted avoucher had to come personally to the office.Requirements to qualify as a ‘‘microentrepre-neur’’ were very low––showing proof of pur-chase of work materials or presenting abusiness card sufficed. In the attempt to over-come the information asymmetries betweensuppliers and voucher users, the office was toprovide microentrepreneurs with informationon the ‘‘rules of the game’’ of the project inorder to induce the functioning of the voucherscheme according to the ‘‘classical’’ theory.At the office, leaflets could be obtained with

the addresses of the providers and the coursesoffered. The provision of information washowever, limited to basic data on the certified

training providers––no more, no less. Hence,microentrepreneurs interested in current courseschedules had to contact the providers them-selves––at high transaction costs. Consequently,the insufficient provision of information by thevoucher office limited the choices microentre-preneurs could effectively make. By March2000, when the bulk of the research was done,more than 37,500 vouchers had been distributedin total. 2

(a) Market supply: the training providers

In March 2000, 61 providers of trainingcourses were certified. The vast majority ofthem were situated in Asunci�on or within theradius of a 2-h drive from the capital. Certifiedtraining providers offered courses in suchdiverse fields as accounting, cooking, computermechanics, cooling technology, cosmetology,electrical engineering, electricity, graphicdesign, hairdressing, management, physiother-apy and tailoring. In some cities around As-unci�on, there were usually only one or twotraining providers that participated in thescheme. In general, the courses offered werevery diverse which made it difficult to findproviders that actually competed against eachother with the same products.The enumeration of certified institutes says

nothing about which institutes and whichcourses were successful and which were not,nor does it show which institutes had moremarket power than others. Yet, it is noteworthythat more than half the number of institutesoffered courses geared at a female clientele.Courses within the voucher scheme were

limited to 20 h in order to keep them short andpractice-oriented. However, many institutesoffered courses that consisted of six subcoursesof 20 h each, or modules. Each of these mod-ules was paid for by one voucher. Voucher-holders were free to take each module at adifferent institute. If they were dissatisfied withthe quality, they could continue with anotherprovider, given that other providers offered thesame courses.Some institutes adapted to this risk by

handing out certificates to the participants onceall six modules had been successfully com-pleted. This gave the microentrepreneur astrong incentive to stay with the same institu-tion for all six modules. The implication of thisis clear: even when participants were dissatis-fied, they had a reason to continue with thesame provider until their annual six vouchers


were used up. They might have hoped thatthe course would improve over time and mightbe interested in obtaining the certificate. Ina country where few of the microentrepre-neurs had obtained professional training, thevalue of this certificate is not to be underesti-mated.The enormous quantity of distributed

vouchers showed that courses for microentre-preneurs were a profitable segment for trainingproviders. What became clear during myresearch was the excess demand for certaincourses, especially for providers who had areputation for excellent teaching, materials, orinfrastructure. In the case of one provider inAsunci�on, which offered high-quality courses inmechanics and electricity, the didactic machin-ery was donated by a German Christian non-governmental organization (NGO). Marketforces alone apparently did not give rise to acompetitor with the same state-of-the-artcourses and comparable material. Since courseswere limited to 25 participants and werealready overbooked, the provider alone wasincapable of satisfying demand.Competition between the training providers

was limited first by geography. Second, themore technically specialized a provider, the lessprobable it was that other competitors wouldbe able to offer the same services. Most pro-viders experienced excess demand for thecourses. The growth of market supply wastherefore significantly slower than that ofmarket demand: the market was unbalanced.With the system of modules and certificates,some providers reduced the risk of losing cus-tomers. As a consequence, the participantstended to stay with one provider for the dura-tion of all their annual vouchers.

(b) Market demand: the microentrepreneurs

Between 1998 and spring 2000, almost 80%of all participants in the project were female,which is in line with earlier research. 3 Of allcourses taken by the participants in thescheme 35% were courses on hairdressing, 18%on cooking and baking, 18% on decorationand cosmetology, 20% were courses in elec-tricity, mechanics, and computer repair, 7%were handicraft courses, and 2% were miscel-laneous. 4 Hairdressing and cooking made upmore than half of the courses. If courses intailoring and handicraft production as well asdecoration and cosmetology are included,these accounted for almost 80% of all courses.

The remaining 20% were taken mostly bymen, in mechanics, electricity, and computerrepair.Of the 50 interviewed voucher users in my

sample, 33 were engaged in various income-generating activities. Having diverseoccupations is, of course, typical for microen-trepreneurs in any less-developed country andParaguay is no exception. For these intervie-wees, the voucher project was used to obtainskills in one profession while the others werenot given up. Undertaking various occupationsat the same time allowed them to develop aportfolio of income-generating activities and toreduce the risk of income loss when the demandfor services or goods of one profession sud-denly declines.Many of those interviewed adapted their

occupational portfolio to market demandwithin their social networks. For example, onewoman interviewed worked as a ‘‘physiothera-pist,’’ i.e., she gave massages to the elderly orsick in her neighborhood. At the same time, shecooked and tried to sell this food to construc-tion workers at nearby sites during lunchtime.If she was unable to sell all of the food, she usedit to feed her family. Later in the day, she cutthe hair of friends or neighbors who required ahaircut. This woman worked as a physiother-apist, cook, and hairdresser at the same time.This pattern was common for the majority ofparticipants in the scheme. It is understand-able that these participants did not necessarilyperceive themselves as being ‘‘microentre-preneurs;’’ rather, they saw themselves ashousewives who make money by cutting hair,baking, and giving massages. The occupationschosen by them reflected their short-termadaptation to market demand for these ser-vices. The occupational activities could changeeasily once market demand varied, but only ifthe ‘‘professions’’ could be practiced with littleinvestment expenditure and required only basicskills.Information on market behavior was

acquired by asking the participants how theyhad learned of the existence of the voucherproject. Selected forms of obtaining informa-tion on the projects were the press (newspaper,radio, and television), friends or family, andtraining providers. The importance of the pressin transmitting information on the scheme wasminimal within my sample. A large number ofinterviewees had been informed by friends orfamily, but even more had been informed bythe training providers directly. This fact is


important to conclude how information flowswithin the project. A large number of micro-entrepreneurs first went to training providers toinquire about courses on offer. The providersthen informed them of the possibility ofobtaining a voucher in order to pay for thespecific course in which they have showninterest. As seen in my interviews, the partici-pants often did not know that they actually hadthe right to choose between different providerssince this was information that providers werenaturally hesitant to give.The participants interviewed often chose the

provider closest to home, or one that was well-known in Asunci�on. Information obtained byfriends and family members on the projectwould generally take the following form: ‘‘Myneighbor (friend, cousin, etc.) told me that Icould take a baking course at the �InstitutoCarolina’ (!) with these vouchers’’––which gavethem the impression that this was only possibleat ‘‘Instituto Carolina.’’ In most interviews,being informed of the possibility of choosing adifferent provider later on did not make themicroentrepreneur change the decision onwhere to take the courses. Interestingly, theinformation flow in the project reality wasinverted. The voucher users often did notchoose between the suppliers of training cour-ses before reaching a conclusion about whichoffer was best for them, but were influenced intheir choice by convenience (how close a pro-vider is to home), opinions of friends, timeconstraints, and so on, and by the way in whichinformation on the rules of the project wastransmitted to them. As with the invention ofthe module system and the distribution of cer-tificates, this shows again that the providerscontrolled market demand and made theirmarket power felt––contrary to ‘‘classical’’voucher theory. Of the 50 people interviewedby me, only two answered that they had firstchosen between suppliers by looking at differ-ent courses and the picked one according totheir needs. Nevertheless, the majority of thoseinterviewed expressed their satisfaction with thecourses. The reasons for dissatisfaction givenby the very few who expressed their discontentare interesting. Some were disappointed withthe teachers or criticized the training materialsor the infrastructure of the provider. Otherswere disappointed because, as they put it, thetraining providers did not distinguish in theircourses between the participants with a broadknowledge of the subject and mere beginners.Courses were geared mostly to beginners, and

the participants in question, with many years ofexperience, were dissatisfied with not beingtaught anything new.Basically all of those interviewed, even those

partly dissatisfied, thought that the course hadhad positive repercussions for their work. Thisconsisted of the acquisition of new techniques,knowledge about new materials, or informationon how to economize on costs. Twenty-five ofthe interviewees said that the sale of goods andservices had increased. Of these, 15 were hair-dressers. The case of the hairdressers wascharacteristic of all the members of this group.Many of the hairdressers lived in marginalareas of Asunci�on. The purchasing power oftheir clients was very low and competition wasstrong. But, since prices could not be lowered,quality of service was decisive. Because of thecourses, quality of service was higher thanbefore. Clients noticed that and commented ontheir satisfaction to friends, family, and so on,which increased the client base and sales. Tell-ing clients that one took training courses oreven being able to show them the framed cer-tificate helped to assure them that they weregetting their money’s worth.

4. EXIT, VOICE, AND VOUCHERS

After a few years of operation, the merits ofthe Paraguayan voucher system had beendescribed as follows:

[The project] has altered the balance of power withinthe microenterprise training market. . . enhancing mic-roentrepreneurs’ purchasing power and ability to voicetheir preferences to training providers (Schor & Gold-mark, 1999, p. 17, my emphasis).

Interestingly, this statement shows a clearsimilarity to the Friedman quote mentionedabove. Here, exit is also considered a proxy forvoice. It is perceived as an open articulation ofpreferences.Yet, distinguishing between exit and voice

has shown that this is not the case. There sim-ply is no institutionalized mechanism of‘‘voice’’ with the help of which preferences arerevealed in the Paraguayan scheme. If we takeinto account the fact that the voucher projectintended to overcome information problems, itbecomes clear that the Paraguayan project, aswith any voucher project in the Friedman tra-dition, is based primarily on that expression of


dissatisfaction which carries the least amountof information: ‘‘exit.’’

(a) Exit

In the Paraguayan case, exit is hindered bythe strategies of the providers. The conditionsfor frictionless functioning of the exit mecha-nism exist only rudimentarily. As has beenobserved, some geographic areas do not have asufficient number of suppliers for consumers tochoose from. Even in the city of Asunci�on,there are only a handful of providers thatactually offer identical courses. The fact that alarge part of the microentrepreneurs inter-viewed selected a provider that was close tohome shows that proximity of course providersis an important factor in the choice of courses.The exit option thus becomes viable only whenthe proximity of competing course providersmakes exit possible and the transaction costs ofchanging are low.The limitation of six vouchers per year also

does not allow for the necessary ‘‘comparisonshopping.’’ The ‘‘consumption’’ of courses isnot repeated often enough with different pro-viders if all courses are taken at the sameinstitute. The pressure that can be exerted onthe course providers is thus limited, especiallysince mechanisms such as the module systemand certificates serve as an incentive to staywith one provider. Moreover, the courses areusually not affordable for the microentrepre-neurs without the voucher-grant. This meansthat the microentrepreneurs are very interestedin obtaining vouchers, and even more so theless they can actually afford the courses on theirown. Since many microentrepreneurs use thecourses in order to learn something completelynew and have never before received vocationaltraining, they are not in a position to evaluatethe course quality as experts would. They showa certain degree of loyalty toward the courseproviders that postpones exit. It goes withoutsaying that the ideal competitive voucher-mar-ket mechanism is rarely matched by reality. Butsince the voucher scheme in Paraguay broadlyhad this ideal in mind, it is useful to see how theexit mechanism is hampered in this case andhow difficult it seems to be to get the exit optionto work as freely as envisaged by the theory ofvoucher projects. Interestingly enough, some ofthe observations made in Paraguay have beenmade in other voucher projects as well. InEcuador and C�ordoba, suppliers sometimeshanded out vouchers themselves and were

understandably reluctant to give any in-depthinformation about the detailed workings of thevoucher scheme (Fitzgerald et al., 2001a, p. 8;Fitzgerald et al., 2001b, p. 13). In C�ordoba,voucher users showed only a limited under-standing of how the project worked and, as inthe case of Paraguay, the suppliers were themain source of information for voucher users(Fitzgerald et al., 2001a, p. 27).

(b) Voice ex-ante and voice ex-post

So much for exit in Paraguay. But whatabout voice? According to Hirschman, voiceplays a decisive role in those cases where pro-ducers should be ‘‘educated’’ by the clients.Yet, after the observations made so far inParaguay, it seems as if Hirschman’s originalconcept of ‘‘voice’’ is still too narrow if onetakes into account the complexities of theinformation asymmetries inherent in trainingmarkets.Consequently, I would argue that we must

distinguish between two forms of voice. Oneform is what I would call ‘‘voice ex-post.’’When customers, clients, citizens, and so on aredissatisfied with a good, a service, or a situa-tion, they use voice to articulate their discon-tent. In this case, they have to have alreadyexperienced the good, the service, or the situa-tion that caused the discontent. Another formis ‘‘voice ex-ante,’’ which basically serves totransmit information on preferences beforerequired goods or services exist in the market.In this case, ‘‘educating the producers’’ through‘‘voice ex-ante,’’ becomes essential to trans-mitting vital information on what it is thatpeople really want.Thus, when there is a need to ‘‘educate the

producers,’’ ‘‘voice ex-ante’’ has to be possible.This is a crucial point in the case of the Para-guayan scheme. Since explicit use is made ofcourse providers that already exist in the mar-ket but have not yet offered courses for mic-roentrepreneurs, ‘‘educating’’ these producersis necessary in order to overcome the infor-mation asymmetries between course providerswho do not know the preferences of microen-trepreneurs and the microentrepreneurs them-selves. Within the Paraguayan project design, itremains unclear how suppliers of courses are toinform themselves about the demand and thepreferences of the microentrepreneurs. It isassumed that they do, but how they do it is notspecified. There is simply no institutionalizedform of ‘‘voice ex-ante.’’ Nor is there an insti-


tutionalized form of ‘‘voice ex-post,’’ but thishas to do with the nature of voucher schemes ingeneral, which by definition rely on exit and inthis case limit the provision of information tothe inadequate information given to thevoucher users by the distribution office.As a consequence for any training voucher

scheme, the need for some form of voice ex-ante in order to articulate preferences and forvoice ex-post in order to give feedback on thecourses becomes obvious.Still, a significant observation from the Par-

aguayan case remains unexplained. Why are themajority of voucher users female heads ofhouseholds with various simple income-gener-ating activities and the majority of courseschosen primarily in baking, cooking, hair-dressing, and cosmetology? One could say that asimilar question is addressed by Goldmark andFitzgerald (2001). They highlight that ‘‘unem-ployed’’ as well as what they call ‘‘potentialmicroentrepreneurs,’’ i.e. clients with only abasic prior knowledge of the courses they take(and therefore practically identical with thegroup identified as the main voucher users inParaguay), are among those whose demand forvouchers is generally extremely high. This theyexplain by ‘‘disbursement pressures fromdonors and from consumers to allow the par-ticipation [of a broader segment of voucherusers other than to limit it only to establishedmicroentrepreneurs]’’ (Goldmark & Fitzgerald,2001, p. 17). Another reason are the economichardships faced in numerous Latin Americancountries were voucher schemes have been setup (Argentina, Bolivia and Ecuador) and whichhave caused a number of ‘‘unskilled’’ people tostart making a living as microentrepreneurs(Goldmark & Fitzgerald, 2001, p. 18).Although there certainly is some truth in this,

I believe the main reason to be different. Thefact that vouchers are handed out broadly andnot only to established microentrepreneurswould, on first sight, enlarge the possible clientbase for training course providers. As the moreexperienced entrepreneurs can still participate,one would think that the competitive marketmechanism would automatically bring forthcourses tailored to every microentrepreneur,whether established or not. Still, this did notseem to happen in the observed voucherschemes. In my opinion, the reason for this doesnot lie in the structure of market demand i.e. thedifferent voucher users, but in the behavior ofthe suppliers who, as has been shown, dominatethe market contrary to what ‘‘classical’’ voucher

theory proposes. My research suggests that thetraining market in Paraguay evolved in theobserved way because voice ex-ante and voiceex-post were absent. Without information onthe real preferences, suppliers themselves had tofind out what ‘‘sells.’’ As many of them were notsure whether the project would work, and hadno idea what a ‘‘microentrepreneur’’ was orwould want to learn, they opted for the strategythat entailed the least risk for them. The easiestoption was then to supply beginner’s courses.These courses were easy to organize, limited tobasic techniques, required little technical orteaching material, and could be repeated anindefinite number of times. The courses in‘‘hairdressing,’’ ‘‘cooking,’’ ‘‘cosmetology,’’ andso on fit neatly into the risk-averse strategy ofcourse providers. As my interviews revealed,however, it also applied to more technicallysophisticated courses. Because of the excessdemand that suppliers experienced for theircourses, providers felt that their business strat-egy of providing ‘‘basic’’ courses functionedwell. This helped the female heads of house-holds with various rather simple income-gener-ating activities, in themselves a large number ofeconomically active Paraguayans, but did nottake into account the more experienced micro-entrepreneurs.Providers offering technically sophisticated

courses with a considerable amount of techni-cal input were not able to satisfy demand.Apparently, market forces alone did not sufficeto spawn other providers of technicallysophisticated courses, and vouchers were sim-ply unable to change that. High entry costs inthe form of costly technical equipment, as wellas the uncertainty of a return on the moneyinvested, were prohibitive. The number ofmicroentrepreneurs choosing technical courseswas limited by the number of courses available.Thus, from the outset, voucher schemes mighthave to be limited to courses that are so easilycopied that competing providers will emergequickly. The competitive market mechanismcannot be relied upon to ensure automaticallythat competitors can reproduce the practices ofsuccessful providers. With the number of tech-nical courses limited anyway, the market thusskews toward rather simple courses in techni-cally unsophisticated subjects such as hair-dressing and cooking.Critical comments on the courses were nor-

mally made by interviewed participants whohad considerable professional experience.Those participants usually pointed out that the


courses did not distinguish between partici-pants with little or considerable knowledge ofthe field. There was no way in which these moreexperienced participants could ‘‘educate theproducers,’’ neither ex-post nor ex-ante. Thepreferences of microentrepreneurs with profes-sional experience were thus not easily articu-lated within the voucher scheme.Overall, the project still has a considerable

developmental impact. Next to the large num-ber of people trained, one of the successes is, ofcourse, the fact that vouchers are a form ofsubsidy that ties funds to a specific use andminimizes the possibility of fraud. Since stateinstitutions are not capable of providingenough professional training possibilities, it isbetter that state institutions supervise thescheme without providing courses themselves.The voucher scheme apparently automati-

cally caters to mostly female microentre-preneurs who make a living with variousincome-generating activities and who areanything but experts in their fields due to alack of vocational training and experience.Yet, it is in itself positive that this moreerratic type is the one that profits from thescheme.

(c) Future research agenda

Important lessons can be learned from theParaguayan experience that should guide fur-ther research on voucher schemes in generaland microenterprise training schemes in par-ticular. Information asymmetries had beendefined as the major reason why no market formicroenterprise training courses exists. ‘‘Tra-ditional’’ voucher schemes, however, relyheavily on the exit mechanism to ensure thatpreferences are articulated and met and thus ona mechanism that provides very little informa-tion on real preferences. The necessity ofdesigning and introducing elements of institu-tionalized voice ex-ante and ex-post in suchprojects has become abundantly clear. It is thebiggest challenge for any voucher scheme thatrelies on ‘‘educating the producers.’’ With thedistinction made in this paper, a more thoroughconceptualization of the information require-ments in training voucher schemes is possible.It is important that project designers identifythe necessary ‘‘voice’’ in training voucherschemes as twofold. Hence, future researchshould investigate how to institutionalize thetwo forms of voice. The following lessons learnt

can give some indications in which directionthis research should go.The lack of institutionalized voice ex-ante

might be a reason why Fitzgerald andGoldmark(2001, p. 3) state that ‘‘one of the least under-stood aspects of designing a voucher program isdemand for training in this market.’’ At anotherpoint they highlight that ‘‘no program to datehas developed a reliable means of understandingconsumer attitudes prior to the introduction of avoucher program’’ (Fitzgerald & Goldmark,2001, p. 7). This shows the necessity to integratethe concept of voice ex-ante in the phase ofproject design. Derham et al. (2001, p. 20) havestated that ‘‘program administrators may wantto think about investing resources in moresophisticated demand surveys and tools.’’ Buthow this is to done in practice is yet to be spec-ified. The same refers to voice ex-post. Post-course questionnaires have been advocated as ameans to find out about consumer satisfaction(Fitzgerald & Goldmark, 2001). However,‘‘most people rate training highly, whetherthrough true satisfaction or reluctance to appearcritical’’ (Derham et al., 2001, p. 20). Mecha-nisms other than questionnaires will thus have tobe identified that give even more room fordetailed voice ex-post.Until recently, the BDS-approach to vouch-

ers envisaged the provision of information invoucher schemes in form of an institutionalized‘‘information function.’’ Usually, this meantthat an entity such as the voucher distributionoffice or the project administration served asthe main provider of information for voucherusers and training providers alike and wasresponsible for collecting and disseminatingvital project data. The experience with variousvoucher projects (Ecuador, Cochabamba,C�ordoba, next to Paraguay) has shown, how-ever, that this function is often only rudimen-tarily fulfilled, if at all (Fitzgerald et al., 2001a,2001b; Fitzgerald et al., 2001). With the con-cepts of ex-ante voice and ex-post voice, thenecessity of direct voice between potential and/or actual voucher users and training providersbecomes clear. Further research should deviseand investigate mechanisms to facilitate thedirect contact between suppliers and potentialusers instead of relying on a ‘‘third-partyinformation facilitator’’ such as a voucheroffice which might not function as planned.Finally, donors could also analyze whether

planned training voucher schemes should belimited to courses with little technical sophisti-cation and to microentrepreneurs with little or


no experience from the outset. This might ensurethe easy emergence of a larger number of com-peting providers––in itself a necessary precon-dition to ensuring the functioning of thecompetitive market mechanism. It would alsolimit the necessity to ‘‘educate the producers’’through voice ex-ante. Otherwise, grant mecha-nisms have to be found that will enable suppliers

to invest in the necessary technical equipment.At the same time, voice has to be institutional-ized. If this is not done, skewed markets willdevelop, as in the Paraguayan case. While this isto the advantage of a large number of especiallyfemale microentrepreneurs with little experience,it does not necessarily cater for others whocannot use ‘‘exit’’ as a proxy for ‘‘voice.’’

NOTES

1. Case Studies published on projects in Cochabamba

(Fitzgerald, Goldmark, & Andrade de Orozco, 2001),

C�ordoba (Fitzgerald, Addis Botelho, & Andrade de

Orozco, 2001a) Ecuador (Fitzgerald, Addis Botelho, &

Anrade de Orozco, 2001b), and Paraguay (Addis Bot-

elho & Goldmark, 2000).

2. The data on the disbursed vouchers were obtained

from Addis Botelho and Goldmark (2000, p. 16),

GAMA (1999, p. 24), and from the data archive of the

CEPAE (the voucher distribution office in Asunci�on).

3. The high female participation was characteristic of

the project from the beginning. See BCP (1997) and

Goldmark et al. (1997).

4. Data obtained from the voucher distribution

office.

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