Syndicate content

Add new comment

I think that the core thesis of the paper that the improvements in the functioning of labour markets particularly those with the highest gains from trade is incontestable and perhaps even self-evident. And it is heartening to see that this thesis finds strong support in the data. Even in countries such as India in my view there are substantive gains to be had from migration – the key question is how one ensures that this happens at a faster pace. Where I differ with the authors is in their understanding of the role of financial services. I feel that in comparing financial services with interventions such as cash transfers or deworming they make a fundamental error. Financial services in my view merely facilitate the transfer of the households own resources from one period to the next (savings and loans) and from one state of the world to another (insurance and investments). Good access to financial services allows people to take their current income as close to their permanent income as possible and allows them to benefit from income enhancing opportunities such as education and migration thus effecting, over very long periods of time, sometimes even across several generations, a gradual improvement in household welfare. The other interventions referred to in the paper all involve augmenting the current income of the household through transfers of one kind of another or effecting an immediate improvement in its stock of human capital, and may have very different multipliers but are all fundamentally different in character from financial services. The analysis the paper presents is an ex-post one -- in which the after the search process was completed the outcomes are being evaluated. The role of financial services in lowering risks faced by households by allowing them to save or borrow money to pay for a visa; pay for temporary housing in their destination; ensure financial security for those that they leave behind; so that they may more aggressively participate (ex-ante -- without necessarily knowing the outcomes before hand) in such search / risk taking processes needs to be borne in mind as well before dismissing the relative impact of financial access relative to migration. Maybe good financial services access is indeed the “key of keys” needed to unlock the potential of migration and not a substitute as the authors suggest. In my view the microfinance impact studies the authors refer to were evaluations of specific very narrow designs of financial products and these studies I hope will eventually throw some light on which designs fit most closely with which types of households. And, while it may be fair to conclude that they found that in a year and a half mechanically and uniformly offered Grameen style microloans do not seem, on average, to have had a direct impact on incomes of borrowers over this very short period of time, in my view it is incorrect to jump from that to state that comprehensive access to high quality financial services does not reduce poverty. The spill-over effects of financial access are very high (the rich man taking a loan to build a large factory that employs a number of people is doing a lot to reduce the poverty of those people even when they did not themselves borrow any money) and the transmission paths are very long. The natural experiments type evaluations carried out Pande and Burgess (2005) and other cross-country studies linking financial and economic development are, in my view, far more accurate empirical tests of the links between Arrow-Debreu complete financial markets and welfare. It is also important to note that in countries such as India provision of financial services does not involve the investment of public resources and banks and non-bank financial institutions (including those that just focus on making Grameen style microloans) are very profitable institutions that attract good amounts of both commercial equity capital and debt financing. However facilitating access does require good regulation, innovations on the part of the financial system, competitive market conditions and facilitative infrastructure such as broadband access and currency chests (which too are profitable interventions on a stand-alone basis). A blog post from IFMR Trust ( discusses this point in some detail. And, in my view even where facilitating such access may have involved the use of public resources, such as in Africa, as development interventions they should be viewed more as complements rather than as substitutes of the other interventions that the paper refers to.