Viewing all posts with tag: Subsidy  

Cash Transfers: The Conversation Continues

Last night FAI had the pleasure of co-hosting a lively and informative panel discussion on the impact of cash transfers in international development with the Microfinance Club of New York.  The panel (moderated by FAI's Timothy Ogden) included Paul Niehaus and Jeremy Schapiro, co-founders of GiveDirectly, Jenny Aker, Assistant Professor of Development Economics at The Fletcher School, and Johannes Haushofer, Assistant Professor of Psychology and Public Affairs at Princeton University. 

As is to be expected when you mix practitioners and academics, the evening's conversations had a good mix of thoughtful insights, debates, and allusions to other bodies of work for futher research.  Below is a list of what was mentioned as well as some additional items we feel are a nice complement for the issues raised by the panelists, including a new FAI infographic showing what we know so far about microcredit. . . 

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A Hard Look at Soft Commitments

In an interview with FAI, economist Jenny Aker explained that effective commitment savings products are those that balance flexibility and restrictions:

“If you give someone a savings product and it completely ties their hand, they don’t want to use it.  They want to have a little bit of that tying of the hand so they can’t spend that money but they don’t want to be completely divorced from access to that money.”

Much of the research on commitments focuses on savings products, which makes sense: when trying to save money, some “tying of the hands” helps. Like dieting, setting money aside requires the willpower to deny yourself something you want in the present to meet a goal in the future.  To win the struggle for control between your present self and your future self, little commitment nudges can change behavior.  Where product design gets tricky is in determining how restrictive the commitment should be.  A study of savers in Kenya gives us one clue that it might not take much: when given the choice of letting neighbors hold the key to a savings lock box or holding the keys themselves, participants saved more when they chose the latter.  Simply having the physical barrier of the box was enough to nudge them to save . . . 

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When Regulators and Remittances Collide, Migrants Lose Out

Just about everyone agrees that international remittances should be cheaper. If you run the numbers on international remittance flows, incomes of recipients and transaction costs, you can make a case that reducing remittance costs would be among the highest ROI interventions for raising incomes of poor households in the developing world (and given what we’re learning about the use and benefits of cash transfers, there’s good reason to believe the money would be well spent).

As this became clear over the last 10 years, the World Bank, IADB and plenty of NGOs have drawn attention to the issue—and have largely succeeded in dramatically reducing the cost of sending money home (costs do still vary widely depending on sending and receiving country). Still, most people I talk with think costs should fall even more . . . 

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Grants Double Income but not Empowerment for Ultra-poor in Uganda

A new paper by Chris Blattman (Columbia) and co-authors provides optimistic new evidence on the returns to providing cash grants to impoverished women in northern Uganda.  The new experiment varied whether the ultra-poor, largely women, were offered a business grant worth $150, training and supervision, and found dramatic impacts of the cash grant on entrepreneurship, hours worked, individual earnings, and household consumption.

The paper stands out from previous studies in that it finds strong positive impacts for women, and that it does so among the most impoverished people in the village.  Only those people identified by a local nonprofit as the poorest fifteen people in each village (86 percent of whom were women) were eligible for the study.  Previous studies of cash and in-kind small enterprise grants delivered to women in Sri Lanka and in Ghana find more mixed effects.  Grants to female-owned microenterprises had, on average, no impact in Sri Lanka, and in Ghana, only in-kind grants or grants made to initially more profitable female microenterprises appeared to benefit recipients . . . 

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Walmart is Coming for Your Banks

In April Walmart announced the launch of a new money transfer service. I did a double take on the service's low price: $9.50 to send up to $900 from one Walmart store to another – that’s as much as $66.50 cheaper than the price of competing services at Western Union and Money Gram.

This is just the latest example of Walmart's foray into the financial services industry. In 2012 the retailer launched the Bluebird prepaid card with American Express. The product has no monthly fees or minimum balance requirements, making it more affordable than the norm. The cost of cashing a check at Walmart's Money Center is a transparent flat rate, often cheaper than independent financial services centers that take a large percentage of a check's total. The big box store also offers car insurance “one stop shops” at a growing number of locations, and it houses bank branches with “convenient hours, free financial education and unusually forgiving account features”. All in all, Walmart seems to consistently deliver more budget-friendly financial tools than its competitors. And not only do its financial products come at a lower price for consumers; they are all offered in the same place, easing the burden on people who are squeezed for time and transportation . . . 

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The Other Half of the Benefit-Cost Debate

When it comes to costs and benefits, we at FAI tend to focus on benefits. The recent release of the Compartamos microfinance impact evaluation was thus a big event in our office. With our heads in the academic literature, we tend to write a lot about RCTs and other ways to measure benefits of interventions.

We’re contributing to a problem, though. There’s a big danger in conflating impact and value. We can’t say much about  the value of microfinance (or any other intervention) based on benefits alone. The most realistic proposition in favor of microfinance is that relatively small benefits are paired with relatively small costs, leading to a favorable cost-benefit ratio. That’s a hypothesis, of course, and it hinges on a careful reckoning of the cost data.

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Marketing Matters: Increasing Microinsurance Coverage Beyond Lowering Prices

Poor households in developing countries face large and varied risks. Many agriculture-dependent households, for example, are at risk of drought- or flood-induced crop failures or livestock deaths. The death of a family member often implies having to fund expensive burial ceremonies, and if the deceased was the household’s primary earner, replacing her/his stream of income is an even bigger problem. A short “Client Math” survey by the Microinsurance Learning and Knowledge (MILK) project of Compartamos borrowers in Mexico, for instance, shows that funeral costs alone (including the costs of the funeral itself as well as connected costs such as food and drink, but excluding lost wages) typically amount to half of a family’s annual income (my calculations from data described in Poulton and Magnoni 2012). Similar figures have been reported from around the world.

Poor families have imperfect tools to manage these risks. They rely on self-insurance, traditional risk-sharing arrangements, informal insurance networks, and/or credit and savings. These strategies, however, are inflexible and/or expensive, and do not provide enough protection . . . 

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Smart subsidies for microfinance

In a recent column, Nicolas Kristof of the New York Times advocated donating to BRAC, one of Bangladesh’s oldest microfinance organizations. But at a recent U.S. Committee on House Financial Services hearing, Damian von Stauffenberg, chairman of MicroRate, argued against putting donor money into the microfinance sector, saying that donations dilute the MFI’s entrepreneurial drive, lead to inefficiency and lower the quality of operations.

Von Stauffenberg’s fears aren’t unreasonable. Much of the excitement around microfinance stems from the possibility of achieving massive scale through highly efficient operations. And as microfinance moves toward a model of increasing commercialization and focus on sustainability, profitability has become one benchmark by which to measure institutions. But there is a time and a place for donor money, provided it comes in the form of “smart subsidies.”

The idea behind a smart subsidy is that subsidies are neither inherently useful nor inherently flawed. Rather, their effectiveness depends on how they are designed and deployed. There are several concrete ways in which subsidies can help increase the scale of microfinance, and open access to commercial funds and outreach.

First, they can help multiply scale by “crowding in” additional capital. . . 

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