Monthly Archives: August 2014

Does microfinance build lasting relationships among borrowers?

Whether microcredit alleviates poverty or not is a hot topic. And although this undoubtedly is a very important question, other potential consequences of microfinance should not be overlooked. One example is found among the results from a recent field experiment led by researchers of J-PAL (the Abdul Latif Jameel Poverty Action Lab) where it is suggested that access to credit can increase social capital among the borrowers.

Social capital, according to political scientist Robert Putnam, is the collective value of social networks. In the standard microfinance model, which in large part was developed by the Grameen Bank of Bangladesh, a key component is that borrowers form groups of five people and meet on a regular basis. These constellations are intended to put social pressure on borrowers to repay their debt on time. Most research has hitherto focused on whether the meetings with other group members increase the probability of timely repayments. The J-PAL researchers now take the issue in a different direction by instead asking whether these formal meetings lead to the creation of new relationships among borrowers living in urban communities.

In the study, member of 174 different microfinance groups in urban India were interviewed. To see what impact group meetings may have on formation of social capital, the researchers randomly assigned the groups to a different meeting frequency where some borrowers would see each other on a weekly basis whereas others did so only on a monthly basis. Social capital was measured based on how many interactions of both professional and personal nature that the group members had with each other as a result of the meetings.

The results showed that those who met weekly were far more likely to form long-lasting relationships with other group members compared to those who were required to meet only monthly. The economic value of a larger social network may at the onset seem negligble. But these social-capital gains resulted in an increasing willingness to share risks with other group members, which the authors reckon would lead to significant economic returns in the long run.

Increased pooling of risks to make joint investments could certainly give entrepreneurship and innovation a boost. To what extent these social-capital gains could eradicate poverty, however, is unclear since the authors do not provide any estimates of the effect of social capital on income or economic growth.

Social-capital gains may not be how microcredit advocates would normally envision to help the poor, but they may still be pretty useful.

Simon Hedlin

Free exchange: Aid to the rescue

My first Free exchange column in The Economist is published in this week’s issue. An excerpt:

New research suggests that development aid does foster growth—but at what cost?

Aug 16th 2014 | From the print edition

FIFTY years ago the first United Nations Conference on Trade and Development launched a debate about how much money rich countries should give to poor ones to reduce poverty and bolster growth. In the end, the UN settled on a figure of 0.7% of national income—a target subsequently reaffirmed by endless international powwows. Although few countries have met it, aid spending in real terms has nonetheless increased steadily ever since, to $134.8 billion in 2013 (see left-hand chart). Yet economists are still arguing about how much the aid helps—if it helps at all.

Aid comes in many forms, from food and tents handed out to refugees to cash that plugs holes in poor countries’ budgets. Donors tend to stretch the definition, to make themselves look more generous. But the goal, in most cases, is to lift a poor country’s productive capacity through investment in things like roads, schools and maternal health.

What the UN sees as a potent weapon against poverty, others consider money down a rat hole. Critics reckon aid hurts its recipients by fostering dependency, propping up oppressive or incompetent regimes and pushing up the value of poor countries’ currencies, thereby undermining the competitiveness of their exports. If aid helped, they say, the poorest countries would have been getting steadily richer for decades, which they have not (see right-hand chart). Those who favour giving aid argue that it could indeed lift people out of poverty, but rich countries simply do not give enough. It is like sending fire engines to combat a wildfire: it only works if you send a lot of them.

Assessing the impact of aid on economic growth is complicated by the fact that the causality is not always clear. A positive relationship between the two could simply mean that rich countries reward poor ones for implementing policies that would have helped their economies whether or not they had brought in money. Conversely, a negative relationship may just mean that more aid flows to the countries with the most sluggish growth. In neither instance would aid actually be driving growth.

To get around this problem, economists have long hunted for a factor that affects the amount of aid disbursed but is not otherwise correlated with growth—an “instrumental variable”, in the jargon. Finding one is harder than it seems. Many proposed candidates—such as the size of a poor country’s population or even the colonial empire to which it used to belong—have been found by subsequent studies to have an independent connection to economic performance after all.

Read the rest of my article here.

Simon Hedlin

Women in politics: Treating the fair sex fairly

And here is my second article in the print edition this week. It presents some new evidence that shows that female politicians are just as competent as male politicians. One commonly proposed rationale behind women’s underrepresentation in politics is that they generally are less qualified than men. But as this research suggests, that is unlikely to be true:

Female ministers are fewer than their male colleagues, but equally effective

Aug 9th 2014 | From the print edition

“A TOKEN sprinkling of women,” is how Luciana Berger, a member of parliament for the opposition Labour Party, dismissed the recent British cabinet reshuffle, the avowed aim of which was to make the government less male. Similar cries of tokenism followed last year’s appointment of Julie Bishop as Australia’s foreign minister, which made her the sole woman in the country’s cabinet. Almost everywhere women are in a minority in government cabinets (see chart for a selection of countries). Some fret that they are treated as mere window-dressing, making the government look more representative but given neither meaningful portfolios nor the support needed to be effective.

New research suggests such criticisms may miss the mark. In a forthcoming paper, Maria Escobar-Lemmon and Michelle Taylor-Robinson of Texas A&M University compare the experience and accomplishments of the men and women among 447 cabinet ministers in recent administrations in five countries in the Americas: Argentina, Chile, Colombia, Costa Rica and the United States. Experience was measured by relevant academic background, previous cabinet posts and political connections; and success by the number of bills presented, length of tenure and whether a minister’s time in office ended with firing or forced resignation.

Read the rest of the article here.

Presidents and growth: Timing is everything

The first of my two articles in this week’s print edition discusses the empirical evidence on whether Democratic presidents or Republican presidents are better at making the American economy grow:

Why the economy has grown faster under Democratic presidents

Aug 9th 2014 | From the print edition

“SINCE 1961…the Republicans have held the White House 28 years, the Democrats 24,” said Bill Clinton in 2012. “In those 52 years, our private economy has produced 66m private-sector jobs. So what’s the jobs score? Republicans 24m, Democrats 42[m].” In the two years since, Barack Obama has increased the Democrats’ lead by close to 5m.

Since the second world war the economy has done better under Democratic presidents, who have overseen more job creation and higher stockmarket returns than Republican leaders. During this time the economy has grown about 1.8 percentage points faster when a Democrat occupies the White House (see chart). Messrs Clinton and Obama credit their economic policies. But new research suggests it has more to do with luck.

Alan Blinder and Mark Watson, economists at Princeton University, studied the last 16 presidential terms—from Harry Truman’s second to Mr Obama’s first—to find out why the economy has grown faster under Democrats. They were quickly able to rule out some possible explanations, like a president’s age and experience, or which party controlled Congress. Though one might surmise that Democratic presidents inherited hardier economies than Republican ones, they actually tended to take over when times were more difficult.

Read the full article here.

Simon Hedlin

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