Esther Duflo, winner of the Nobel Prize in Economics 2019, is the Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics at the Massachusetts Institute of Technology.
Interviews
Interview with Dr. Esther Duflo, co-author of “Poor Economics”
Tuesday 24 May, 2011
| Mobile Money
In light of the recent publication of “Poor Economics”, the new book by Abhijit V. Banerjee and Esther Duflo, MMU caught up with Dr. Duflo to discuss some relevant themes to help our readers understand the broader impact of mobile financial services in the economics of the poor. Today, we publish the first part of our interview focusing on the topics of financial inclusion and savings.
For more than fifteen years Abhijit V. Banerjee and Esther Duflo have worked with the poor in dozens of countries spanning five continents, trying to understand the specific problems that come with poverty and to find proven solutions. Their new book is radical in its rethinking of the economics of poverty, but also entirely practical in the suggestions it offers. It argues that so much of anti-poverty policy has failed over the years because of an inadequate understanding of poverty. Through a careful analysis of a very rich body of evidence, including the hundreds of randomized control trials that Banerjee and Duflo’s lab at MIT has pioneered, they show why the poor, despite having the same desires and abilities as anyone else, end up with entirely different lives.
MMU: Dr. Duflo, Congratulations on the book launch. How do you measure impact for financial inclusion? Widely believed to be an important factor to lift individuals out of poverty, do we actually have evidence that the existence of financial services leads to increased income?
ED: There is some evidence. There is a paper by Robin Burgess and Rohini Pande that looked at the “social banking” regulation in India: for several decades, banks were forced to open bank branches in rural areas. Burgess and Pande found that poverty reduced and poor household were able to diversify their activity when rural bank branches were opened. At the same time, there were many problems with the scheme (not least that a lot of the loans the banks made were never repaid, and ended up being used for political giveaways), so the Indian government eventually shut down the scheme.
There is also a recent study by Pascaline Dupas and Jonathan Robinson, where they measure the impact of access to a savings account by randomly offering to pay the opening fees for a number of depositors. They find that not all people who have access to the free account use it: most men did not, and among them, about half of them did. But even though, a large effect was evident: small business owners were able to save and buy in bulk at better prices, so their income increased. They were able to deal better with health shocks, such as a bout of malaria. We need much more evidence on the effect of access to financial services. The problem is that the cost of opening this savings account is very large (more than 5 dollars by account). Finding a way to reduce this will be essential to make financial inclusion possible.
MMU: A household that wants to invest in a new business uses savings as a way to accumulate collateral and increase the amount they can borrow. Yet many poor households have a hard time finding a place to save. How can mobile money help address this situation?
ED: There are many reasons why it is hard for poor people to find a safe place to save, but one reason is that banks do not want to deal with very small accounts, due to the fact that the paperwork needed to accept savings is demanding. That means that only bank employees are allowed to handle money that belongs to a depositor. And there is not a bank branch in every town.
With mobile money, if the account is linked to a bank, people will be able to wire money in and out of their savings accounts using local correspondent, without having to trek all the way to the bank. A number of countries have passed new laws permitting this kind of deposit taking (in India, for example, this is called the Banking Correspondent Act), and this may be greatly help by mobile money. This might eventually revolutionize the whole business of savings.
MMU: In the book you make an argument that exercising self-control with regards to savings decisions tends to be more difficult for the poor? How can this problem be addressed?
ED: It is difficult for everyone, but the poor suffer the additional handicap that the goods they really aspire to may be relatively harder to reach. So even when they have a savings account, or other savings opportunity (like investing in their own business), they don’t always take advantage of it. Innovative financial products that have a “commitment feature” to them. For example, some accounts could be earmarked for a specific goals, ‘school fees’ or ‘fertilizer’, and could not only be released for this goal. Or the money could be locked for a certain period or until some specific goal has been met. A study by Nava Ashraf, Dean Karlan, and Wes Yin showed that these types of account can help those who take them up to save more. One could design even more creative program targeted exactly around the needs of the specific person. For example, coffee farmers could decide IN ADVANCE, to dedicate part of the big lump sum they get at the end of the season towards a specific goal. We are hoping to pilot soon such a program in Kenya or Tanzania.
Tomorrow we will be posting the second part of this interview with Dr. Duflo.
Esther Duflo is Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics in the Department of Economics at MIT.. She has received numerous honors and prizes including a John Bates Clark Medal for the best American economist under 40 in 2010, a MacArthur “genius” Fellowship in 2009. She was recognized as one of the best eight young economists by the Economist Magazine, one of the 100 most influential thinkers by Foreign Policy since the list exists, and one of the “forty under forty” most influential business leaders under forty by Fortune magazine in 2010. Together with Abhijit Banerjee and Sendhil Mullainathan of Harvard University, she founded the Abdul Latif Jameel Poverty Action Lab in 2003.
