8 minute read
Fighting poverty through private sector development
Russell Toth reflects on his research agenda in private sector development, as he prepares to lead an emerging research project on financial systems reform funded by the Bill and Melinda Gates Foundation.
Advertisement
When I was 19 years old, I moved from western Canada to Hungary. My father had escaped Hungary in 1956 during the Hungarian Revolution, when many young Hungarians left for countries like Canada, the US, and Australia. Hungary had come under Soviet communist rule after WWII, and growing up I heard many stories about the hardships communism had wrought. Moving to Hungary in the late 1990s massively expanded my perspective. While I had been interested in economic and business news growing up, it was altogether different to experience the consequences of different economic policies and systems first hand.
During my last year in Hungary I did a year of study in accounting and economics through the London School of Economics and Political Science’s distance learning program, and the next year I transitioned to college in the US. As I reflected on my time living in a country in economic transition, I started reading books by economists writing on economic development, such as Muhammad Yunus (who won a Nobel Peace Prize for his work founding the microfinance movement in 2006), William Easterly, and Hernando de Soto. I became particularly interested in the critical role private sector enterprise could play in driving broad-based economic prosperity. While I didn’t even know what a PhD was until late in my undergraduate studies, I knew I wanted to focus my career on enabling the private sector to generate broad-based economic opportunity and prosperity.
Fast forward to today, I’m a development economist at the School of Economics at the University of Sydney. Development economics focuses on economic development in lower- and middle-income countries (LMICs). This research field has changed dramatically in the last 20 years, from approaches based more on applying broad ideas about market liberalization, to a much more detailed focus on how specific economic policies and institutions can actually work best in practice. This typically involves data-driven research, in some cases through experimental tests of promising approaches. This naturally leads to intensive collaborations between development economists and practitioners, in governments, international organizations, NGOs, and more commonly in recent years, the private sector. Three of the pioneering leaders of this approach to development economics, Abhijit Banerjee, Esther Duflo, and Michael Kremer, were recognized with the Nobel Prize in economics in 2019.
My work focuses on enabling the private sector, particularly in southeast Asia and the Pacific. While economists are known to extoll the virtues of free markets,
Image: Yangon traffic with Shwedagon Pagoda in the distance (photo courtesy of Russell Toth)
there are many situations when free markets can generate outcomes far from what is socially optimal. This can provide a justification for well-designed government intervention. One area of focus in LMICs is on getting financial institutions like banks and microfinance institutions (MFIs) to lend more to small businesses. This can be a tricky proposition for financial institutions, so outreach to this market segment is particularly low. It can take time for banks’ lending officers to learn to do effective loan assessment in these markets, which often generate lower profit margins than lending to large businesses and the wealthy. Meanwhile MFIs’ staff are used to providing very small loans to the poor according to very rigid lending procedures, which are not suited to growth-oriented small and medium enterprises.
To help stimulate the lending market for small businesses, many governments have implemented “credit guarantee” programs. This often involves a setup where banks lend directly to businesses, but the government or a government-funded entity covers a percentage of defaults to the targeted market segment, to offset the bank’s lending risk. For example: for all loans under 10,000 AUD, the government covers 50% of the value of loan defaults, so if loans default at a 4% rate, the government is on the hook for $400. This provides a very high return on investment for the government if these are genuinely new loans. In spite of their global popularity, there is surprisingly little credible research on the effectiveness of such schemes. I’ve been involved in two analyses of one of the world’s largest such schemes, Indonesia’s “People’s Business Credit,” which processed about 5 billion AUD in loans in 2014.
In two separate papers with research students at the University of Sydney, we’ve studied the impacts of the scheme on banks and businesses, respectively. We’ve shown that the program generates ‘additionality’ – lending that wouldn’t have happened otherwise – and in doing so meets goals like increasing employment and reducing poverty. Furthermore, addressing the ability of such schemes to sustainably stimulate lending market activity, we exploit a shutdown of the program to show that it is likely to lead to a permanent increase in banks’ appetite to
lend to small businesses, even once the guarantee incentive is removed. This could be for reasons such as that the program provides opportunities for small business lending officers to improve their capacity to assess borrowers, which makes such lending easier even without an active guarantee. This research contributes to a relatively thin body of knowledge about a set of programs that receive billions of dollars in government investment around the world each year.
These days I’m particularly excited to work directly with private sector organizations, helping generate evidence that can help bolster the business case for products that benefit lower-income households. A key area of interest is in financial inclusion, where innovators are leveraging the massive expansion in mobile phone access in LMICs. Mobile money systems provide basic mobile wallet and funds transfer services, and can also be a conduit for financial services like loans and insurance.
In Myanmar I’ve worked with the leading mobile money company (which manages a network of 65,000 frontline cash-in/ cash-out agents - 70% of whom are women) and a leading commercial bank, to evaluate a digital loan product the bank provides to mobile money agents. The loan is meant to provide liquidity so agents can more easily process mobile money transactions, however there is no formal restriction on how they use the loan. Loan approval is based exclusively on a formula calculated from agents’ prior mobile money processing volumes, completely avoiding the traditional, subjective loan approval process, which can be discriminatory.
By exploiting arbitrary changes in the loan qualification formula, we can estimate the causal effect of the loans. We have shown that the loans generate an average immediate increase of 13% in agents’ monthly mobile money volumes, which tapers to zero within 3 months. This result is of particular interest to the mobile money company, which provides the proprietary database necessary for credit scoring. This is an insight that couldn’t be generated without carefully applying microeconometric data analysis tools. In ongoing analysis we’re also leveraging a phone survey we conducted with 5,200 agents in late 2020, to study impacts of the loans on a much broader range of business and household outcomes, as most agents run a larger small business – hair salon, mobile phone shop, grocery store, pharmacy, etc.
This interest in digital finance sparked an opportunity to help lead a new global research initiative on interoperable digital payments. The project, recently funded by a 3-year, $3.5 million USD grant from the Bill and Melinda Gates Foundation, will involve researching emerging interoperable digital payments systems across a number of LMICs. Interoperability connects the back-end of financial services providers, making it possible for customers of any providers linked to the system, to send and receive payments to each other, lowering transactions costs particularly for the poor. In many LMICs with low Image credit: Wave Money bank account takeup, there isn’t a formal, secure system for clients of one MFI or mobile money company to make transfers in this way. Interoperability may also enable small, innovative providers to more easily enter the market without having to build up a customer network beforehand. The Foundation is particularly interested in interoperable payments systems that adhere to a set of principles that ensure they will be of benefit for the poor (the “Level One Principles”). Our project will quantify the impacts of such systems, and engage deeply with the policy reform process around these systems, to provide evidence-based insights on optimal system design. Stay tuned for the results!
Awards
Vice Chancellors Awards 2020
The Vice Chancellors Awards recognise and celebrate the outstanding contributions of our academic and professional staff to teaching, research and service, leadership, mentorship, and industry and community engagement.
Congratulations to Associate Professor Mark Melatos on receiving a Vice Chancellors Award for Outstanding Teaching and Educational Designer, Dr Jennifer Dowling for receiving the Vice-Chancellor’s Award for Outstanding Contribution to Educational Excellence.
FASS Teaching Excellence Awards 2020
The Faculty of Arts and Social Sciences Teaching Excellence Awards recognise the teaching excellence of staff at all career levels. Recipients have shown a critical reflection of their approach to teaching and learning and demonstrate an improvement to enhancing student learning.
Congratulations to Associate Professor Tim Fisher and Dr Jordi Vidal-Roberts for both receiving Teaching Excellence Awards in 2020.
Journal of Economics & Management - Best Paper Prize for 2019
Congratulations to Dr Rebecca Taylor who won the ‘Best paper published in the Journal of Environmental Economics & Management in 2019’ prize for her article, ‘Bag leakage: The effect of disposable carryout bag regulations on unregulated bags’.
Congratulations to Dr Emilia Tjernstrom for receiving the ‘Outstanding American Journal of Agricultural Economics Article Award’ along with co-authors, Jeffrey D. Michler (University of Arizona), Simone Verkaart (Wageningen University) and Kai Mausch (World Agroforestry) for their paper, ‘Money Matters: The Role of Yields and Profits in Agricultural Technology Adoption’.
International Higher Education Academy (HEA) Fellowships 2019
The HEA fellowships demonstrate the commitment of these staff to professionalism in learning and teaching in higher education. Congratulations to Dr Stephen Cheung and Dr Chandana Maitra for both receiving Fellowships.
