Saturday, April 3, 2010

Linkings literatures in development economics

We are in the midst of reading papers on microcredit programs in my undergraduate program evaluation class. These programs provide small loans to individuals in developing countries while using alternative institutional arrangements, such as group liability, to keep costs down relative to traditional approaches. They often focus particularly on women and have the twin goals of encouraging modernization (i.e. making them more like us) and economic development. The Grameen Bank is the most famous example but there are many other such programs.

The literature is interesting in several ways. Perhaps the most interesting feature is that, despite all the media hype, a veritable supernova of warm glow and the Nobel prize, there is not particularly strong evidence that micro-credit programs pass cost-benefit tests.

Also interesting,though, is that the literature on micro-credit does not seem to be very well-integrated with other parts of the development literature. When I was in graduate school at Chicago, Robert Townsend published his famous paper "Risk and Insurance in Village India" (gated via JStor) that described the ways in which small scale farmers in rural India informally insure one another against common risks. That work spawned a large subsequent literature looking at risk and informal insurance, which has both its positive side and its negative side, as the demands of informal insurance (share your shocks!) can be thought of as a very high marginal tax rate, as in this paper by my student Jessica Goldberg.

It seems to me that the literature on informal insurance has important implications for the literature on micro-credit, in the sense that villagers who use micro-credit to establish successful enterprises likely face high implicit tax rates. Furthermore, informal insurance often works through extended family networks. This has implications for the nature of spillovers in evaluations that try to look at differences within villages between either eligible participants and non-participants or between eligibles and ineligibles. What I have in mind is the sort of analysis done for conditional cash transfer programs by my friend Manuela Angelucci but in the context of micro-credit.

No comments: