DEVELOPMENT ECONOMICS
DEVELOPMENT ECONOMICS APPLICATIONS
To help us move from theory to application, we will look at several common interventions and policies that target particular determinants of growth. We will look at the evidence around some of these interventions and their effectiveness.
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Module Sections
Policies for Capital Accumulation
How do families and individuals invest in capital?
Savings and credit are key components for investment in household capital
Two popular development interventions try to promote household credit and savings to weather economic shocks and increase investments in capital.
Microfinance Programs
Programs that increase access to small amounts of credit are a common intervention used around the world.
Household Savings Programs
In contrast to providing credit, other interventions focus on encouraging families to save income for future consumption and investment.
Microfinance programs are very common throughout the developing world
Program Overview
Microfinance programs offer access to credit to individuals and firms, typically through small loans.
Target Audience
Loans are usually aimed vulnerable populations that do not have access to formal credit systems, especially women and rural households.
Goal
Microfinance programs aim to help individuals achieve several goals:
- Generate new economic opportunities by allowing individuals and firms to invest in critical inputs (e.g., equipment , agricultural inputs, etc.), and
- Provide a cushion against severe economic shocks that destabilize household consumption (e.g., illness, natural disaster, etc.)
Program Scope
Microfinance programs initially came to fame in Bangladesh when they were first developed by Grameen Bank and Muhammad Yunnus in the 1970s.
According to a 2019 report on microfinance worldwide:
- Total value of microfinance loans stood at $124 bn
- ~140 mn people were active borrowers
- Latin America ($48.3 bn) and South Asia ($36.8 bn) had the largest portfolios of microloans
Despite their popularity, microfinance programs have shown mixed results in reducing poverty
Microfinance program impacts have been evaluated across a variety of settings through rigorous randomized evaluations.
Positive Findings
- Microfinance can help support small-scale entrepreneurs. Several recent studies show that small-scale entrepreneurs have better access to high-return investments through microloans.
- In one study in India, access to micro credit raised investment, labor input, and revenues for low-income micro-entrepreneurs who had businesses before they received microcredit.
Null Findings
A rigorous analysis of seven evaluations from around the world found :
- Demand for many of the microcredit products was modest in many cases.
- Microcredit access often does not lead to substantial increases in income.
- Although expanded credit access did lead some entrepreneurs to invest more in their businesses, these investments rarely resulted in profit increases.
Many savings programs around the world try to change individual behavior
Program Overview
In contrast to microfinance programs, savings programs often try to shift behaviors to help individuals save money. Successful programs that have focused on different barriers to saving have shown varying levels of success.
Savings Reminders
Some interventions use reminders to nudge individuals to increase their savings commitments.
Commitment Savings Products
Some savings devices try to help users make smarter spending choices, restricting fund usage through fees on early withdrawal or withdrawal blackout periods.
Reducing Barriers to Saving
Other programs simply focus on making formal saving easier, improving financial inclusion through opening new bank accounts and the use of direct deposits.
Various savings programs have shown some positive welfare effects
Program Impacts
In contrast to microfinance programs, savings programs often try to shift behaviors to help individuals save money. Different programs that focused on unique barriers have shown varying levels of success.
Savings Reminders
An evaluation in Bolivia found limited evidence that SMS reminders increased bank savings amounts among clients.
Commitment Savings Products
Commitment savings devices in the Philippines improved average savings by over 82%, potentially helping clients with self-control challenges.
Reducing Barriers to Saving
A study with the Bank of Malawi found that farmers with bank accounts kept larger savings balances, cultivated more land, and invested more in inputs.
References
- J-PAL and IPA Policy Bulletin. 2015. “Where Credit is Due.” Cambridge, MA: Abdul Latif Jameel Poverty Action Lab and Innovations for Poverty Action
- Text message reminders and incentives to save in Bolivia. The Abdul Latif Jameel Poverty Action Lab (J-PAL). (n.d.).
- Commitment savings products in the Philippines. The Abdul Latif Jameel Poverty Action Lab (J-PAL). (n.d.).
- Reducing Barriers to Savings in Rural Malawi. The Abdul Latif Jameel Poverty Action Lab (J-PAL). (n.d.).
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