When economists hear accounting and development together, they probably think first of Development Accounting. This is a descriptive diagnostic exercise done by macroeconomists which tries to decompose income differences across countries into components like education, physical capital, and TFP. Instead, today I want to talk about accounting research relevant to developing countries. The accounting and development forum is organized by a group of accounting professors at leading business schools, with a “mission is to put more accounting into development, and more development into accounting”. I attended their opening virtual workshop, and was invited to be a speaker in their second workshop, joint with AFFE, a group doing field experiments in accounting and finance. I thought I’d share some of what they are up to, and note that they are very much interested also in interdisciplinary collaborations.
“Why is this accounting?”
One of the classic questions on your econ-seminar bingo card used to be some grumpy person asking “how is this economics?”. So I had to laugh in the opening seminar when one of the speakers noted that the question of “why is this accounting?” is something they face when looking at different outcomes from those usually looked at by accountants. He argued instead for working on questions for which accounting researchers have a comparative advantage – and noted that economists are not shy to stray into topics they may not know as much about “economists don’t understand accounting – they need help” was another quote that made me laugh.
So what sort of work is being done by development accountants?
I thought I’d share some examples of their work, to show how it is likely to be of interest to economists and to policy in developing countries, and to encourage readers to explore more.
Accounting standards, due diligence and transparency
The most recent World Development Report is on Standards. A key question is what the appropriate standards should be in developing countries, which includes thinking about the implications of accounting standards around due diligence requirements and corporate transparency.
· Due-diligence requirements in developed countries around labor (e.g. no child labor), environmental standards, use of conflict minerals, etc. can have impacts in developing countries through supply chains. Most of these regulations have accounting requirements around record-keeping and reporting. Chang and Christensen look at how the Dodd-Frank Act in the U.S. required audits of small-scale mines in the DRC to certify the mines as being conflict-free. They look to see whether this deters armed-group financing and reduces conflict. They find strategic behavior, where audits reduce violence right by the mine, but which is displaced elsewhere so net violence does not fall.
· Thomas Rauter and co-authors do an experiment with a jobs platform in Brazil to see how firm’s ESG (environmental, social, and governance) practices affect talent allocation. They find that, on average, job-seekers have a strong preference for ESG (particularly environmental practices), valuing the ESG signal as equivalent to about 10% of average wages. However, there is heterogeneity in preferences of workers, and in use of these practices by firms. They find that introducing ESG increases allocative efficiency since more productive firms and workers have stronger preferences for ESG, and so are more likely to match together when introduced.
· Asante looks at what happens when harmonized international accounting rules meet the reality of lending in less developed economies. He uses the staggered roll-out of the expected credit loss standard in Ghana to show that banks operating in informal areas reduce lending to households and small enterprises, due to greater documentation frictions under the new standards.
What is the value of better accounting practices for firms?
A key question for accounting researchers is the extent to which better use of accounting and accounting standards would help firms grow in developing countries. That is, how valuable is accounting? They are looking at this through different methods.
· Willingness-to-pay experiments which look at how much firms value accounting. For example, Tomy and Wittenberg-Moerman (open access brief) look at wholesalers and retailers in a large bazaar in northeast India. They note that wholesalers are the main source of credit, but don’t use financial information in credit allocation. They do choice experiments to show that wholesalers would extend more credit if they had reliable sales and profits information, but don’t trust informal firms to provide these data truthfully. And retailers are reluctant to share this information fearing it won’t remain confidential. This shows the need for a verification mechanism for accounts.
· Experiments to try to improve accounting and see what it does. They note that the types of business training experiments that economists have done typically combine accounting with other business practices like marketing, hr management, etc, making it hard to know how much accounting itself matters. Aguilar’s job market paper conducts a RCT in Honduras in which she has an AI-enabled mentor through WhatsApp that tries to increase the salience of accounting as a core language of business, which she finds increases the demand for accounting information and use of accounting as a framework for making business decisions, although there is no significant impact on profits and sales. An ongoing experiment by Colonnelli and Rauter in Uganda works with medium-sized (20 person) firms and assigns a financial consultant to introduce digital accounting software and adopt best accounting and financial reporting practices - with the goal to look at impacts on firm performance.
· A related question is whether better financial information can increase access to credit. Chen et al. look at fintech lending in Kenya based on mobile phone data and “find that access to digital credit improves borrowers’ financial well-being across various mobile-phone-based well-being measures, including monetary transactions and balances, mobility, and social networks as well as borrowers’ self-reported income and employment”.
How can this help economists?
Just as many people’s perceptions of what economists do are much narrower than what economists actually work on, I was struck by how much more overlap there was in this research with that of development economists than I would have expected. Therefore, first a lot of this work should be of direct interest to those of us trying to understand what constrains firms and households from accessing finance, making better financial decisions, and earning more income. Second, for people working on business training, financial education, and related topics, there are likely to be improvements in intervention design from collaborating with or building on insights from experts with domain expertise. Finally, even if you don’t care about accounting or firms per se, the profits of firms are important for measurement and understanding of poverty and growth. But they are typically noisy and hard to measure. To the extent that more accountants working on these topics enable us to get more accurate measures of these key outcomes, we can all benefit.
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