Economic Development

How Microfinance Really Works

How Microfinance Really Works
The Milken Institute Review

Morduch, Jonathan
01/01/2013

About half of the world’s adults lack bank accounts. Most of these “unbanked” are deemed too expensive to serve, or not worth the hassle created by banking regulations. But what may be good business from a banker’s perspective isn’t necessarily what’s best for society. The inequalities that persist in financial access reinforce broader inequalities in the distribution of income and wealth. This is the opening for microfinance and also its challenge. Microlending has been sold as a practical means to get capital into the hands of small-scale entrepreneurs who can then earn their way out of poverty. The idea appeals to our impulse to help people help themselves and to our conviction that bottom-up development depends on the embrace of the market. By eschewing governments and traditional charities, the sector promises to sidestep the bureaucracy and inertia that have hobbled other attempts to expand the opportunities of the poor.

Banking The World

Banking The World
The MIT Press

(eds.) Cull, Robert, Asli Demirgüç-Kunt and Jonathan Morduch
12/01/2012

About 2.5 billion adults, just over half the world’s adult population, lack bank accounts. If we are to realize the goal of extending banking and other financial services to this vast “unbanked” population, we need to consider not only such product innovations as microfinance and mobile banking but also issues of data accuracy, impact assessment, risk mitigation, technology adaptation, financial literacy, and local context. In Banking the World, experts take up these topics, reporting on new research that will guide both policy makers and scholars in a broader push to extend financial markets.

The contributors consider such topics as the complexity of surveying people about their use of financial services; evidence of the impact of financial services on income; the occasional negative effects of financial services on poor households, including disincentives to work and overindebtedness; and tools for improving access such as nontraditional credit scores, financial incentives for banking, and identification technologies that can dramatically reduce loan default rates.

Environmental Policies and Political Realities: Fisheries Management and Job Creation in Pacific Island Countries and Territories

Environmental Policies and Political Realities: Fisheries Management and Job Creation in Pacific Island Countries and Territories
Journal of Environment and Development

Maria Damon and Joshua Graff Zivin
05/07/2012

Effective environmental policymaking requires an understanding of how environmental goals interact with other political goals. This article analyzes development strategies in the PICT’s, where policymakers aim to leverage tuna resources into sustainable economic development and job creation. The authors develop a model that analyzes costs and benefits of different development strategies, with a focus on job creation and local socioeconomic factors that drive optimal policy mixes across PICTs. The analysis demonstrates that investment in fisheries management can effectively encourage economic development and create employment opportunities, and compare this strategy to others such as selling access permits and investing in processing capacity. While many benefits of fisheries management are widely recognized, its ability to create high-quality employment opportunities is often overlooked. For many PICTs, this may represent the lowest cost strategy for jobs creation and, coupled with selling fishery access to foreign vessels, can form a strong basis for economic development plans.

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

The 2013 Federal Budget's Impact on Communities of Color and Low-Income Families

Women of Color Policy Network
02/23/2012

The Obama administration's budget proposal for fiscal year 2013 (FY 2013) strengthens the national economy by investing in schools, communities and safety net programs. The FY 2013 budget also includes a number of important investments in infrastructure that will spur much needed job growth in a time of economic uncertainty for many working and low-income families. It is critical that such investments take into account the persistently high unemployment in communities of color, and target spending to increase the economic security of the communities most impacted by the "Great Recession." Additionally, the budget includes important changes to the tax code that will lay the foundation for a fairer and more equitable economy.

Mission Matters: The Cost of Small High Schools Revisited

Mission Matters: The Cost of Small High Schools Revisited
Economics of Education Review,

Stiefel, L., Schwartz, A.E., Iatarola, P. & Chellman, C.
10/01/2009

With the financial support of several large foundations and the federal government, creating small schools has become a prominent high school reform strategy in many large American cities. While some research supports this strategy, little research assesses the relative costs of these smaller schools. We use data on over 200 New York City high schools, from 1996 through 2003, to estimate school cost functions relating per pupil expenditures to school size, controlling for school output and quality, student characteristics, and school organization. We find that the structure of costs differs across schools depending upon mission-comprehensive or themed. At their current levels of outputs, themed schools minimize per pupil costs at smaller enrollments than comprehensive schools, but these optimally sized themed schools also cost more per pupil than optimally sized comprehensive schools. We also find that both themed and comprehensive high schools at actual sizes are smaller than their optimal sizes.

Portfolios of the Poor: How the World's Poor Live on $2 a Day

Portfolios of the Poor: How the World's Poor Live on $2 a Day
Princeton, NJ: Princeton University Press.

Collins, D., Morduch, J., Rutherford, S. & Ruthven, O.
05/01/2009

About forty percent of the world's people live on incomes of two dollars a day or less. If you've never had to survive on an income so small, it is hard to imagine. How would you put food on the table, afford a home, and educate your children? How would you handle emergencies and old age? Every day, more than a billion people around the world must answer these questions. Portfolios of the Poor is the first book to explain systematically how the poor find solutions.

The authors report on the yearlong "financial diaries" of villagers and slum dwellers in Bangladesh, India, and South Africa--records that track penny by penny how specific households manage their money. The stories of these families are often surprising and inspiring. Most poor households do not live hand to mouth, spending what they earn in a desperate bid to keep afloat. Instead, they employ financial tools, many linked to informal networks and family ties. They push money into savings for reserves, squeeze money out of creditors whenever possible, run sophisticated savings clubs, and use microfinancing wherever available. Their experiences reveal new methods to fight poverty and ways to envision the next generation of banks for the "bottom billion."

Microfinance Meets the Market

Microfinance Meets the Market
February Journal of Economic Perspectives 23(1), Winter:  167-192.

Morduch, J., Cull, R. & Demirguc-Kunt, A.
02/01/2009

In this paper, we examine the economic logic behind microfinance institutions and consider the movement from socially oriented nonprofit microfinance institutions to for-profit microfinance. Drawing on a large dataset that includes most of the world's leading microfinance institutions, we explore eight questions about the microfinance "industry": Who are the lenders? How widespread is profitability? Are loans in fact repaid at the high rates advertised? Who are the customers? Why are interest rates so high? Are profits high enough to attract profit-maximizing investors? How important are subsidies? The evidence suggests that investors seeking pure profits would have little interest in most of the institutions we see that are now serving poorer customers. We will suggest that the future of microfinance is unlikely to follow a single path. The recent clash between supporters of profit-driven Banco Compartamos and of the Grameen Bank with its "social business" model offers us a false choice. Commercial investment is necessary to fund the continued expansion of microfinance, but institutions with strong social missions, many taking advantage of subsidies, remain best placed to reach and serve the poorest customers, and some are doing so at a massive scale. The market is a powerful force, but it cannot fill all gaps.

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