EVALUATION OF CONTINGENT REPAYMENTS IN MICROFINANCE: EVIDENCE FROM A NATURAL DISASTER IN BANGLADESH

Frequent and strictly scheduled repayments and savings in microfinance often deteriorate the liquidity of members in the face of negative shocks. Previous articles suggest the introduction of a contingent repayment system that allows such members to be rescheduled, but the unavailability of a suitable dataset makes it difficult to examine how it would actually work. This study is one of the first to evaluate the impact of this repayment system on household livelihood. In employing a unique dataset from Bangladesh, I show that rescheduling reduces the possibility of binding credit constraints and borrowing from moneylenders, and may also reduce transitory poverty. However, short‐term rescheduling has insignificant effects. Indebted members with less liquid assets are more likely to be rescheduled.     

VULNERABILITY OF MICROFINANCE TO STRATEGIC DEFAULT AND COVARIATE SHOCKS: EVIDENCE FROM PAKISTAN

This paper investigates the repayment behavior of borrowers of a Pakistani microfinance institution (MFI) using a unique dataset of approximately 45,000 installment records over the period 1998–2007. In early 2005, the MFI introduced reforms that included improved enforcement of contingent renewal. The reforms led to a healthy situation with almost zero default rates. We hypothesize that strategic default under the joint liability mechanism was encouraged by weak enforcement of contingent renewal and was one of the factors responsible for the pre‐reform failure. To support this hypothesis, we show that before the reforms, a borrower's delay in installment repayment was correlated with other group members' repayment delays beyond the level explained by possible correlation of project failures due to locally covariate shocks. Such excessive correlation disappeared after the reforms, including the period after the 2005 Kashmir earthquake. The empirical evidence thus demonstrates the existence and seriousness of the strategic default under weak dynamic incentives.     

MIGRATION,SOCIAL NETWORKS,AND CREDIT: EMPIRICAL EVIDENCE FROM PERU

We seek evidence of the causal relationship between migration, social networks, and the probability of receiving credit in a developing country where credit markets are weak and internal migration is common. Migrants may face binding asymmetric information constraints as they often lack collateral. Social networks can help mitigate these constraints. Conversely, migrants might face higher liquidity constraints and might, therefore, demand more credit than nonmigrants. The effect of migration on participation in the credit market is thus ambiguous. Compounding this, migration and credit may be jointly determined. We utilize rich data from Peru to establish the net effect of migration on credit and the role that social networks play in this relationship.     

ON THE MOTHER AND CHILD LABOR NEXUS UNDER CREDIT CONSTRAINTS: FINDINGS FROM RURAL INDIA

There is an emerging consensus that lack of credit is a major cause of child labor and inequality in the intrahousehold distribution of resources. At the same time, patterns in how children spend their time appear to be strongly influenced by maternal employment decisions. This paper includes an assessment of the effect of credit constraints on maternal employment and that of maternal employment on the intrahousehold allocation of labor, a nexus which has been left unexplored by existing studies. Three findings emerge: (1) a mother is more likely to work outside when a household lacks resources, and her domestic labor can be easily replaced by other members, (2) credit market accessibility is one of the major determinants of maternal labor, and (3) elder daughters assume a large part of the burden of maternal employment by providing domestic labor. Under binding credit constraints, results of this study support the collective as opposed to the unitary model of households.     

INTERTEMPORAL CHOICE AND DEVELOPMENT POLICY: NEW EVIDENCE ON TIME‐VARYING DISCOUNT RATES FROM VIETNAM AND RUSSIA

Assuming that individual discount rates are constant over time has important implications for policies and programs that involve intertemporal decision making. Using original data from Vietnam and Russia, we find evidence that discount rates do change over time for many individuals, implying that preferences for savings and credit might not be intertemporally consistent. We find that commonly held beliefs about gender and age influences do not hold once having children and location are controlled for. Within countries, however, residency does matter. Rural Vietnamese populations have higher discount rates, and living in a Russian trading town is associated with significantly higher discount rates and present bias than living in a government town. We argue that these behaviors are particularly likely to influence resource allocation in developing economies because there are fewer formal institutions and competitive markets to temper their effects.     

THE SHORT-TERM POVERTY IMPACT OF SMALL-SCALE,COLLATERAL-FREE MICROCREDIT IN INDONESIA: A MATCHING ESTIMATOR APPROACH

Indonesian microfinance is primarily operated by for-profit commercial banks, characterized by large-scale loans that require collateral. In 2003, the largest nongovernmental organization in the country introduced much smaller-scale loans without a collateral requirement. This scheme is commercialized but potentially more suited to the credit demands of the poor. Applying propensity score matching with the difference-in-difference method, this paper examines whether the emerging microcredit scheme has been successful in targeting and improving the welfare of the poor in the one year following loan disbursement. The results show that although collateral ownership is not an important determinant of participation, relatively wealthier families gain access to microcredit. The impact of microcredit on various household outcomes is generally statistically insignificant, except for sales of nonfarm enterprises for the nonpoor and schooling expenditures for the poor. This implies that the microcredit scheme under study might not have an immediate impact on poverty alleviation.     

THE EQUITY PREMIUM AND RISK-FREE RATE PUZZLES IN A TURBULENT ECONOMY: EVIDENCE FROM 105 YEARS OF DATA FROM SOUTH AFRICA

This paper presents a detailed empirical examination of the South African equity premium, and a quantitative theoretic exercise to test the canonical inter-temporal consumption-based asset-pricing model under power utility. Over the long run, the South African stock market produced average returns six to eight percentage points above bonds and cash, and at the 20-year horizon, an investor would not have experienced a single negative realised equity premium over the entire 105-year period we examine. Yet the maximum equity premium rationalised by the consumption-based model is 0.4%. The canonical macro-financial model closely matches the average risk-free rate, using realistic parameters for the coefficient of risk aversion and a positive rate of time preference.     

FINANCE AND GROWTH: NEW EVIDENCE ON THE ROLE OF INSURANCE

This paper provides new evidence that sheds light on the impact of insurance sector development on output growth, capital accumulation and productivity improvement, using data from 51 countries (developed and developing) during 1981‐2005. The dynamic panel data analysis results demonstrate that insurance sector development affects growth predominantly through productivity improvement in developed countries, while in developing countries it promotes capital accumulation.     

RECOVERY FROM DEPRESSION: AUSTRALIA IN AN ARGENTINE MIRROR 1895–1913

The recovery from the 1890s depression in Australia was prolonged, and economic growth from 1895 to 1913 was below that in the comparable settler economies of Argentina and Canada. Why? Australia’s hesitant initial recovery is typically attributed to the imbalances in the economy resulting from the preceding boom, and its further delay to severe drought. Drawing on Argentine experience, it is suggested that additional factors need to be considered. Unlike Argentina, the unwillingness or inability of Australian governments to reschedule foreign debt or devalue the exchange rate exacerbated the slump. And the era of low‐cost pioneer farming ended earlier than in Argentina (or Canada).     

RATES OF RETURN TO EDUCATION IN BOTSWANA: RESULTS FROM THE 2002/2003 HOUSEHOLD INCOME AND EXPENDITURE SURVEY DATA SET

Using the most recent Household Income and Expenditure Survey data (2002/2003), this paper presents current rates of return to education for Botswana. The results show that the rates of return have in general declined by one percentage point on average between the periods as shown in Table 2 . If we, however, look at the averages for the different school cycles, the fall in the average rates is quite significant at about six percentage points between the periods. The biggest fall is for secondary education, especially upper secondary education, which fell by 28 percentage points between the periods. The rates of return to tertiary education, however, rose by more than 50 percentage points. Ignoring upper secondary, the pattern of rates of return has remained similar to the results of the study based on the 1993/1994 data. Rates are higher for tertiary education and lower for secondary than for primary education. This results are still consistent with rates of return generally rising with level of education. At policy level, the results continue to support sharing of costs between Government and beneficiaries or their parents especially at tertiary education level. Second, the results indicate the need for the country to continue to vigorously pursue job creation and reorient the education system from emphasis on white collar jobs.

Table 2. Mincerian earnings function: overall Ψ
Dependent variable (ln monthly earnings)

Banking in the Shadows: A Comparative Study of China and India

In recent years there has been increasing interest in the rise of shadow banking in China and India. In this paper, we aim to get a better understanding of the differences in trends and investigate the factors leading to the increase of shadow banking in these two major emerging economies. We find that financial exclusion is a common factor leading to the growth of shadow banking in both countries. While financial reform has taken place in India, financially repressive policies still prevail in China. Although several regulatory measures have been adopted in India and China, the size of the shadow banking sector in these two countries remains underestimated. Thus, streamlining and enhancing data collection is a key priority for both nations. We argue that regulation in both countries should be more activity focused (specific field in which a shadow bank is focused on) rather than sector or entity based, and it should be at par with banks. The shadow banks provide last mile connectivity to remote, distant, and ignored segments of the population not serviced by the formal financial sector. As this enhances financial inclusion, a balanced approach is required keeping in view both costs and benefits of the shadow banking system.     

REGIONAL FINANCIAL INTEGRATION IN SUB‐SAHARAN AFRICA – AN EMPIRICAL EXAMINATION OF ITS EFFECTS ON FINANCIAL MARKET DEVELOPMENT

This article examines the effects of political agreements on regional financial integration (RFI) on financial market development and access to and cost of finance in Sub‐Saharan Africa (SSA). Our results suggest that RFI positively affects financial development – measured very broadly as ratio of liquid liabilities to gross domestic product (GDP) – when combined with a sufficient level of institutional quality. If institutional quality is below a threshold level, RFI apparently has negative effects on financial development. However, we cannot find any significant effects of RFI on the ratio of private credit to GDP or on the efficiency of the banking sector. Regarding the effects of RFI on access to and costs of finance of enterprises in SSA, our results are mixed. We can find no significant effect of RFI on access to finance for all firms in the aggregate, but the results indicate that RFI actually impedes small firms' access to finance. Furthermore, there is a significant positive influence of foreign bank involvement on the severity of the credit constraint for small enterprises, while we do not find such an influence for large enterprises. These results provide some support for the foreign bank barrier hypothesis in the context of RFI.     

LINKING POVERTY AND INCOME SHOCKS TO RISKY SEXUAL BEHAVIOUR: EVIDENCE FROM A PANEL STUDY OF YOUNG ADULTS IN CAPE TOWN

Is there a link between household income and income stress, and risky sexual behaviour of young people? Anecdotal and qualitative evidence suggests this may be the case, but there is little quantitative research measuring this relationship. We use two waves of new data from the Cape Area Panel Study to investigate this link for 2,993 African and coloured youths aged 14 to 22 in 2002. In the process, we discuss one type of research design that could allow for a causal interpretation of the effect of income poverty on HIV risk. This design plausibly separates out the effect of income stress from the effect of living in a poor household by comparing behaviours across households with and without negative economic shocks, conditional on baseline income. Our results indicate that females in poorer households are more likely to be sexually active in 2002 and more likely to sexually debut by 2005. In addition, girls in households experiencing negative economic shocks are more likely to reduce condom use between 2002 and 2005. However, they are less likely to have multiple partners in 2002 or have transitioned to multiple partners by 2005. Males who experienced a negative shock are more likely to have multiple partners. Despite the tight research design for assessing shocks, the findings on the impacts of shocks do not generate clear recommendations for policy. There appears to be no systematic difference in condom use at last sex by household income levels or income shocks.     

INTRODUCTION TO A STUDY OF INTRAHOUSEHOLD RESOURCE ALLOCATION AND GENDER DISCRIMINATION IN RURAL ANDHRA PRADESH,INDIA

In this special issue, we use unique household data which was collected exclusively for our study in Andhra Pradesh, India, with the help of an NGO. We estimate and test the intrahousehold resource allocation rules, incidence of child labor, and the effects of credit constraints on time allocation among household members. Three empirical papers of this issue indicate the overall support for the collective model against the unitary model of households, clarified the role of household structure, and show the nature of mother‐child labor substitution under a binding credit constraint. In addition, a survey paper discussing the recent trends on educational attainment and the empirical strategies in identifyng the policy effects are included.