When There Is Not Enough Credit to Go Around: The Challenges of Accessing Microcredit in Myanmar

As financial regulations lax and with the entrance of more nongovernmental organizations into Myanmar, microfinance and the availability of microloans have made it much easier for citizens of Myanmar to gain access to credit that they would not otherwise have access to. However, the demand for credit is far greater than the current supply. Currently, over 2.8 million clients have access to microloans in Myanmar. As that number continues to grow, credit constraints, the lack of credit availability, and the lack of financial literacy has made it difficult for people who need credit the most to access it. (The World Bank)

An article from the Myanmar Times published on March 1, 2017, Agricultural Sector and SMEs to Receive Private Bank Loans, talks about recent policy changes implemented to help farmers and small business owners. With the intervention of the Myanmar Private Sector Development Committee (PSDC), the committee has passed into law that private banks in Myanmar must grant a minimum percentage of all their commercial loans to people in the agricultural or SMEs (Micro, small, and medium-sized enterprises) sectors (Htwe.)

The current Agricultural Minister of Myanmar, Myint Hlaing, has stated, “The agricultural sector is the backbone of Myanmar’s economy as the entire agricultural sector contributes 30% of its current GDP. In addition, 61% of the country’s labor force is working in the agricultural sector” (Centre for Agriculture and Bioscience International.) Since agriculture is such a large part of the Myanmar economy, it is understood that additional funding and capital is required for the industry and economy to develop.

As of now, microloans are only made by state-owned banks. Local private banks rarely lend to local borrowers because of the lack of profitability and high risks of lending. Many of the private citizens who require microloans do not have the collateral nor credit history to justify receiving a loan, and laws set by the government cap the amount of interest that private banks can charge on these private loans (13%.)

(The World Bank)

The state-run banks currently charge an 8.5% interest rate and an 8% interest rate to SMEs and farmers, respectively. Should a borrower go to a private bank, they would be charged a 13% interest rate. Currently, it is unfeasible for private banks to
match the interest rate of the state-run bank, as they pay 8% interest rates on banking deposits (Htwe.) The main issue here, is deciding upon interest rate that would satisfy the state-run bank, the privately-owned bank, and the borrower.

With the passing of the 2016 Monetary Law, banks are no longer required to collect collateral when deciding who to give loans out to, but that just makes the vetting process more difficult. Despite the law, many private banks still require collateral as they cannot thoroughly vet borrowers, and many banking relationships in Myanmar are built on trust and reputation (Htwe.)
U Thein Myint, a deputy general manager at one of Myanmar’s privately-owned banks argues that, “If people fail to pay back their loans, the banks will encounter difficulties in paying deposits from its customers. This is detrimental to the financial system and the national economy. Therefore, for people seeking bank loans, they need to provide strong guarantee.” Until there is a proven high chance that commercial banks will be paid back, loans provided for the agricultural and SMEs sectors will remain low (Htwe.)

A retired vice president of the Myanmar Central Bank, U Than Lwin, hopes that the government can work out an arrangement with private banks so that money can be lent to people who need it the most. A proposed idea would be for the government to implement a system so that they can partially guarantee loan repayment, which would make the lending process for banks much easier. Another idea would be to mitigate risk by lending to a larger group of people, by spreading the amount of risk that people would take on when taking out a loan.

Some of the issues described in the article written by Chan Mya Htwe regarding microcredit are also issues seen in countries struggling to meet the demand for microcredit by their citizens. This is amongst one of the many challenges encountered for governments or NGOs implementing a microcredit and microfinance program in a developing country (Schaffner.) In a country where access to finance is difficult and people are spread out across rural areas, there is adverse selection on both sides for both the borrower and lender. Lending caps and inconsistent lending practices make it hard for borrowers to access loans. This usually results in a loan from multiple financial institutions or a loan shark (Schaffner.) The inconsistent income that depends on the planting and growing season along with the lack of good jobs makes it difficult in certain cases, for people to pay back their loans. With the new law instituted by the government preventing banks from collecting collateral on loans, the end result is an inefficient outcome where the borrower does not get the money they need for their everyday life and the lender just makes loans elsewhere where the financial institution knows they will be paid back.

Private financial institutions need a new way to thoroughly vet prospective borrowers if they cannot collect collateral beforehand (Htwe.) There is a possibility of lending to large groups and spreading out risk through group liability, but in every borrowing and lending situation, I feel that the lender assumes a lot more risk than the borrower.

The first microloan programs were first instituted in Myanmar in the mid-1990s (Soe.) As new laws are passed and as regulations become more lax, there have been an increase in NGOs in the country, making small loans to farmers and small business owners. The exchange rate, interest rate caps, along with high denominations in its currency discourage more NGOs coming in (Soe.) As the program continues to grow, I hope that microloans and microfinance can reach people in areas that still are not developed, or destroyed by the ongoing Civil War. I think that the Myanmar government needs to do more for its citizens, rather than rely on outside humanitarian organizations to provide a basic lifestyle for people who need it the most. This is a difficult problem that I feel would not be solved anytime soon, as lack of financial literacy in its citizens, lack of access to large amounts of credit, and lack of willing lending institutions keeps people stuck in the cycle of poverty.


Schaffner, Julie. Development Economics. N.p.: Wiley, 2014. Print.

Ray, Debraj. Development Economics. N.p.: Princeton UP, 1998. Print.

C. (n.d.). CABI and China boost agricultural development in Myanmar. Retrieved May 09, 2017, from http://www.cabi.org/membership/news/cabi-and-china-boost-agricultural-development-in-myanmar/

Tun, T., Kennedy, A., & Nischan, U. (2015). • Promoting Agricultural Growth in Myanmar: A Review of Policies and an Assessment of Knowledge Gaps (No. 230983). Michigan State University, Department of Agricultural, Food, and Resource Economics.

Htwe, C. M. (2017, March 01). Agricultural sector and SMEs to receive private bank loans. Retrieved May 09, 2017, from http://www.mmtimes.com/index.php/business/25141-agricultural-sector-and-smes-to-receive-private-bank-loans.html

Soe, H. K. (2016, September 06). Can microfinance still make a difference? Retrieved May 09, 2017, from http://frontiermyanmar.net/en/can-microfinance-still-make-a-difference

Banking on Trust: An Analysis

An in depth analysis of the study entitled “Banking on Trust: How Debit Cards Enable The Poor to Save More”.
Written By: Kaushik Nagarur


Financial Institutions have long been the backbone to many countries’ economies. Institutions such as JP Morgan and Bank of America are critical to the economy of America. Economic development is related closely to these financial institutions. The growth of a developing country can directly be linked to these financial institutions. Yet, what is it that drives and causes people to invest in these financial institutions? A study done by Pierre Bachas, Paul Gertler, Sean Higgins, and Enrique Siera entitled “Banking on Trust: How Debit Cards Enable The Poor to Save More”, attempts to answer this question. The study looks into whether or not trust in a financial institution is needed in order for people to use formal financial services (Bachas et al 1).


In order to examine this question, Bachas used a natural experiment that was occurring in Mexico. A natural experiment is an “observational study in which an event or situation that allows for the random assignment of study subjects to different groups is exploited to answer a question” (Messer). In this case the natural experiment was to answer whether or not there was a connection between trust and the use of formal financial services. The experiment had to do with the handing out of debit cards through a Mexican cash transfer program known as Oportunidades. Oportunidades was a cash transfer program that provided bimonthly cash transfers to poor families. The objectives of Oportunidades was to “Increase capacities in health, nutrition, and education of poor families” (Projects). Essentially the program put money into a savings account and gave poor families money conditional on the fact that the families have to send their children to school and must have regular health checkups.

The program was being conducted in three different time periods (waves), and the authors used these “waves” in order to create their natural experiment. There were three major groups based on the roll out of these debit cards. There were two treatment groups that received the debit cards one year apart, and one control group that received the debit cards at the end of the study period. The authors used a combination of high frequency administrative data on bank transactions as well as survey data of the beneficiaries. The survey data was to explore whether or not people were learning to trust the bank, people use the banks, and people understand how savings work. The authors analyzed 343,204 accounts at 380 Bansefi branches over a four-year period from November 2007 to October 2011(Bachas et al 8).

Analysis and Results

The first analysis that was done in the paper by Bachas was the effect of the debit cards on the stock of savings. In order to estimate the effect of the debit cards on savings, a difference in difference regression was done. The reason that a difference in difference regression was needed was to control for other shocks including “time effects”, as well as control for general individual differences that might affect the outcome. The following formula (Figure 1) was utilized in order to understand the balance effect and see whether debit cards affect the overall balance in an account (Bachas et al 9).

Screen Shot 2017-04-23 at 6.24.03 PM

Source: Bachas, Pierre, Paul Gertler, Sean Higgins, and Enrique Seira. “Banking on Trust: How Debit Cards Enable the Poor to Save More.” NBER Working Paper Series 23252 (2017): n. pag. Web. 24 Apr. 2017. Formula 1

Balance was the average balance in the account over time period t. The  lI is the account level fixed effect, while d is the fixed time period effect. The Tj is a dummy variable that is 1 if there is treatment, and the last term is a time dummy variable. The most important variable is  fk which measures the average difference in balances between treatment and control group in period K. The following figure V is the result of this regression (Bachas et al 42).

Screen Shot 2017-04-23 at 7.36.45 PMSource: Bachas, Pierre, Paul Gertler, Sean Higgins, and Enrique Seira. “Banking on Trust: How Debit Cards Enable the Poor to Save More.” NBER Working Paper Series 23252 (2017): n. pag. Web. 24 Apr. 2017. Fugure 5 page 42

The figure plots the coefficient  fk and the confidence interval. There are two important conclusions in the figure. The first one is that there is no difference in the pretreatment levels between treatment and control groups. Second is that around 8 months after receiving a debit card, balances start to change. After around 2 years with the card, balances are 1,400 pesos higher for the treatment group over the control group. In wave 2, savings begin to rise much more quickly after receiving the card. This is likely due to information spillovers from wave one (Bachas et al 10).

The second major question is what effect trust has on the flow of savings at the beneficiary level. Whether or not someone trusts the bank can be calculated using a dummy variable. In the surveys, they ask “do you leave part of the monetary support from Oportunidades in your bank?”(Bachas et al). After they answer, the authors ask why they do or do not leave money behind. Based on that they capture lack of trust.  Since trust is endogenous, it is possible to use it as an instrument variable with the date of debit card assignment. The main reason to do this is that it isolates variation in trust that can be explained exogenously by time with the card. What results is the following formula( Bachas et al 10).

Screen Shot 2017-04-23 at 8.02.28 PM.png

Source: Bachas, Pierre, Paul Gertler, Sean Higgins, and Enrique Seira. “Banking on Trust: How Debit Cards Enable the Poor to Save More.” NBER Working Paper Series 23252 (2017): n. pag. Web. 24 Apr. 2017. Formula Pg 56

Essentially this formula is just trying to see what effect trust has on the proportion of average income. When running the 2SLS regression test, a statistical test to see the correlation between two items, the authors came up with the following table.

Screen Shot 2017-04-23 at 8.05.38 PM

Source: Bachas, Pierre, Paul Gertler, Sean Higgins, and Enrique Seira. “Banking on Trust: How Debit Cards Enable the Poor to Save More.” NBER Working Paper Series 23252 (2017): n. pag. Web. 24 Apr. 2017. Table II PG 56

This table shows two major conclusions. The first stage shows that an average of six additional months with the card leads to a 10.3 percent increase in trusting the bank. The IV coefficient in column 2 states that those who trust the bank as a result of this six additional months save an extra 2.8% on their income (Bachas et al 56).

The paper as a whole has two major implications. The first is that the people who received debit cards save more. The second major conclusion is that trust plays an important role in the savings effect. Once people who received these cards started trusting the bank, they started saving much more.

Why does it matter?

The conclusion reached by the authors have policy implications that can be used in order to help financial institutions. First and foremost, building savings has been shown to have positive effects on business investment. This is shown in the experiment Saving Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya, done by Dupas and Robinson. While looking at banking in rural Kenya they found that “Market women use these (savings) accounts to save up to increase the size of their business” (Dupas et al. 185). This means that savings accounts have a direct effect on business which has a direct effect on the economy as a whole. Savings accounts can also help smooth consumption curves. In other words, savings accounts help make sure that your expenditures do not fluctuate too much after an unforeseen emergency such as a health emergency. Savings accounts have also been linked to a way out of Poverty. Mullainathan and Shafer wrote a paper entitled “Savings Policy and Decision Making in Low income households” where they conclude that access to formal savings accounts may “provide an important pathway out of poverty” (Mullainathan et al 9). With all these papers on the importance of savings, it is easy to see that helping the poor in developing countries. Debit cards, encourage people to save in these intuition’s due to the fact that people can see their account balance. This ability lets them trust the institutions more. It is important that governments utilize this information and this technology in order to help others.


Works Cited:

Bachas, Pierre, Paul Gertler, Sean Higgins, and Enrique Seira. “Banking on Trust: How Debit Cards Enable the Poor to Save More.” NBER Working Paper Series 23252 (2017): n. pag. Web. 24 Apr. 2017.

Bukari, Jeff. “Using Your Debit Card Might Actually Make You Richer.” Fortune. March 22, 2017. http://www.fortune.com/2017/03/22/debit-card-how-to-get-rich/

Dupas, Pascaline, and Jonathan Robinson. “Savings Constraints and Microenterprise Development: Evidence from a Field Experiment in Kenya.” American Economic Journal: Applied Economics 5.1 (2013): 163-92. Web.

Messer, Lynne C. “Natural Experiment.” Encyclopædia Britannica. Encyclopædia Britannica, Inc., 07 Oct. 2016. Web. 24 Apr. 2017.

Mullainathan, Sendhil and Eldar Shafr, Savings policy and decision-making in low-income households, in Insu‑cient Funds: Savings, Assets, Credit and Banking Among Low-Income Households, 121145 (New York City: Russell Sage Foundation Press, 2009).

“Projects & Operations.” Projects : Support to Oportunidades Project | The World Bank. World Bank, n.d. Web. 24 Apr. 2017.




The Bolsa Familia Welfare Program in Brazil and its Impact on Poverty and Inequality

An analysis of the Bolsa Familia program compared to models and theory from 416 – by Erica Ryan

My dear friend and colleague Rafael is from Brazil. For a long time I didn’t quite understand why he was here at the University of Maryland. Not only is Brazil the largest country in South America, it also has the largest population, largest economy, and is home to a vast amount of the natural resources in South America.[1] Even so, the socioeconomic climate in Brazil is far from perfect. For this blog post I am going to focus on two articles that appeared in the Rio Times in early 2017, one titled “Economic Crisis to Push 3.6 Million Brazilians Into Poverty” and the other “Forty Percent of Children Under 14 Live in Poverty in Brazil.”

The first article talks about how the current economic hardships could push up to 3.6 million more Brazilians into poverty by the end of 2017, with most of the new poor living in urban areas. There is a welfare program in Brazil called Bolsa Familia that provides cash transfers to low income families, and the current crisis could add up to 1.16 million families to the program. Currently, there are no plans to increase funding for Bolsa Familia.

The second article talks about how seventeen million children under 14 are currently living in low income households, which is approximately 40% of the population in this age group. The North and Northeastern regions of Brazil are in a more critical state and have much higher percentages than the average (approximately 60% and 54% respectively). Around 5.8 million of these children are living with a per capita income of less than 25% of the minimum wage.

Income inequality and poverty are really big problems facing Brazil today. According to World Bank Data, the top 10% of the population holds 40.7% of the total income while the lowest 20% only holds 3.6% of the total income as of 2014.[2] Since 2014, the economy has continued to shrink, many political leaders have been accused of corruption, and the president of Brazil was impeached, leading to the poverty and suffering discussed in the two articles.

The Bolsa Familia program is very important for improving conditions for the poor people in Brazil, particularly for poor children. The cash transfers it provides are conditional on the children of the family going to school and receiving regular health checkups.[3] The cash transfer it provides should assist in reducing poverty simply because the poor now have more money, but it is important to look at both the income and the welfare of the poor when determining the effectiveness of the program. The conditionality of the transfer will do more in the long run to further reduce poverty and inequality and increase welfare.

The cash transfers make it easier for kids to attend school longer. When the decision of whether or not a child should continue attending school is being made, the expected utility of the education has to be compared to the opportunity cost (the wage they could earn if they worked instead) of that time spent in school. Because of time inconsistent preferences, people tend to discount the future benefit of education, which can lead to under consumption of education. For poor families this can be especially true because they need the income now, rather than later. So without the transfer, many children may end up working instead of going to school. With the transfer, the utility of education is increased, making the benefit of sending children to school higher.

The 1992 paper by Mankiw, Romer, and Weil shows that the accumulation of human capital is an important factor for economic growth in a country in the Solow model.[4]  The current recession in Brazil is caused by a variety of factors unrelated to the Solow model; however, in order for Brazil to move past their recession and work towards positive economic growth, accumulation of human capital is vital. Because Bolsa Familia requires that children attend school in order for the family to receive the transfer, this program is promoting education which, according to theory, should contribute to rising economic growth. Studies have also shown that increased education leads to higher wage profiles later in life.[5] Requiring that these poor children continue their education could lead to a reduction in inequality if, because of their education, they are able to obtain higher paying jobs as adults and break the trend of generational poverty.

The health checkup requirement of the transfer can also lead to higher human capital and increased productivity. Being healthy means that kids don’t have to miss as much school and will be able to learn more. Regular health checkups can also help to identify and correct health issues that might otherwise become major problems later on in their lives, limiting their future productivity. Studies of the Bolsa Familia program have shown that most of the transfer is used to purchase food, clothing, and school supplies for the children.[6] The nutritional component of food consists of quality and quantity, and malnutrition is linked to higher rates of mortality and stunting. The transfer would effectively relax the budget constraint. This could help families satisfy their nutritional needs while also allowing them to re-optimize and select foods with greater variety and nutritional content, which should have positive effects on welfare.

The current sociopolitical climate in Brazil is certainly less than optimal, and it is absolutely terrible that so many more people, including many children, are going to be pushed into poverty as a result of this recession. The Bolsa Familia program will be vital not only in the current alleviation of poverty, but also for sustained reduction of poverty. The investments the program makes in children will help to improve the health and welfare of poor children, while also allowing them to increase their human capital. According to the Solow model augmented with human capital, this should lead to higher growth rates, which should help Brazil to escape their recession. The increase in human capital should also help poor children to escape generational poverty, which will lead to a reduction in inequality. The Bolsa Familia program is important not only for improving the lives of the poor, but also for moving Brazil as a whole towards a better socioeconomic climate.

[1] https://blog.oup.com/2016/08/10-facts-economy-brazil/

[2] http://databank.worldbank.org/data/reports.aspx?source=poverty-and-equity-database


[4] http://eml.berkeley.edu/~dromer/papers/MRW_QJE1992.pdf

[5] https://www.brookings.edu/blog/up-front/2012/09/17/education-is-the-key-to-better-jobs/



The two articles I analyzed are as follows:

Economic Crisis to Push 3.6 Million Brazilians Into Poverty

Forty Percent of Children Under 14 Live in Poverty in Brazil


The Dollarization of Ecuador

An evaluation of the effects of Ecuador’s decision to dollarize – Phill Waugh

Dollarization is the process of aligning a country’s currency with that of the U.S. dollar. Like El Salvador, Ecuador decided to dollarize in an effort to provide its citizens and economy much more stability. Throughout the late 1990’s, Ecuador experienced a terrible economic crisis that caused the value of the Sucre, Ecuador’s previous official currency, to fall at an incredible rate. By the year 2000 the inflation rate was just over 96 percent and the citizens had already begun using the USD informally. Within the year the country joined Panama, El Salvador, and other developing countries around the world and decided to officially dollarize.

The decision to dollarize does not come without its consequences, both good and bad. It is most important to note that dollarization had its intended impact on Ecuador by bringing stability to the economy and quelling its obscene inflation rates. So much so, within three years of dollarization the inflation rate was back down to single digits where it has since remained. Dollarization provides further stability through decreased transaction costs when trading with other countries as the USD is such a prominent currency worldwide. Not only are these transaction costs mitigated but exchange rates are much more stable on the global scale. Many citizens also find comfort in that their government is not in control of monetary policy and it must make up for this with seemingly transparent fiscal policies such as changes in taxes.

In the case of Ecuador, it seems to have a more positive influence on the economy but it does have its pitfalls. Oddly enough, while many enjoy the idea of putting their government in a position to have to be transparent, there are those who would argue the lack of control over monetary policy is dollarization’s most regrettable attribute. This proved to be a real issue in 2008 when the U.S. was going through what we now refer to as “The Great Recession” and there was little Ecuador could do from being impacted as well. Inflation rates went up over 8 percent that year, the highest it has been since it’s come down from Ecuador’s initial dollarization in 2000. This lack of access to monetary policy is unfortunately not only limited to times of economic strife. It also means that Ecuador is incapable of strategic devaluation which could lead to a surge in exports.

The particular issue highlighted in the article published by El Comercio focuses on the recent appreciation of the USD, particularly against the Colombian Peso. This appreciation of the USD has had many negative effects on the Ecuadorian economy, most notably, a diminishing exchange rate and Purchasing Power Parity (PPP) between Ecuador and Columbia. Without access to monetary policy, there is little the Ecuadorian government can do to influence this issue.

While this appreciation has given Columbia an incredible boost in competitive prices for goods, it continues to impact Ecuador’s economy negatively. Such incredibly competitive prices have led Ecuadorians, even those on the other side of the country, to plan semi-annual trips to Ipiales, Columbia, a small town just on the other side of the northern border, where they can purchase the exact same brand goods for between 30 to 60 percent less. These goods are so much cheaper that it is actually monetarily beneficial for Ecuadorians to travel, shop for months worth of goods, stay in a hotel, and travel back over the course of a couple days as opposed to just shopping locally. Those who can make same day trips almost always do because there is no incentive to purchase anything on the Ecuadorian side of the border.

With Ecuadorian citizens continually going abroad for goods as simple as toiletries and coffee on a consistent basis, the economy is always suffering from enormous cash outflows. These outflows leave the country at risk of causing stunts in their own economic growth. What is worse is that these stunts would likely only be emphasized if Ecuador were to attempt to de-dollarize their economy and return to the Sucre. The instability of the Sucre and lack of control of monetary policy leaves Ecuador’s economy between a rock and a hard place.

Even if Ecuador could and wanted to de-dollarize, it would not have a large positive impact on their exports because they are an oil producing country which is standardized by the USD. In this case, de-dollarizing would only incur the transaction costs that they had eliminated to begin with. If the Ecuadorian government could find some fiscal policy that were to influence the exchange rates between Ecuador and Columbia so that they were not so out of control then they might be able to even out the PPP and keep more business on their side of the border.

Despite the cash outflows and being at the mercy of American monetary policy, Ecuador has reaped many benefits that other Latin American countries have not, such as increased trade with the U.S. Even with the troubles Ecuador faces as a dollarized country, they are much better off for it and the economy is as stable as it has ever been.








English Translation of the Article

Buyer number 25 only pays half the total of his bill. This promotion is heard in a speaker of the Alkosto Hypermarket, one of the most visited self-service places by Ecuadorians in Ipiales (Colombia). Promotions like this, which are applied from Monday to Friday, continue to attract hundreds of nationals, who cross the bridge of Rumichaca, to go shopping. The appreciation of the dollar against the Colombian peso is another factor that affects and even compensates for many the expenses in transportation, food and lodging . To verify the difference in prices, a team from EL COMERCIO DATA traveled to Ipiales to buy USD 100 in basic products, which are currently the most demanded in the neighboring country.

The purpose was to make a comparative of prices, including the taxes that are taxed in each city. Overall it was found that in Ipiales cost USD 96.82 less than in Quito, which accounted for 34% of difference. The conversion of the currency was made at 3312 pesos per dollar, which was the change to June 2016, when the trip was made. Yesterday, September 20, the change was 2928 pesos per dollar, which would mean about 10 dollars more to the invoice of purchases made in Colombia. For Aurora Sánchez, 38, this difference is significant for her economy and for this she travels with her siblings once a month. It prioritizes purchases between products of toilet and certain provisions, which are cheaper. For example, in Quito, a shampoo of the same brand and presentation costs USD 8, while in Ipiales it is USD 5, including all taxes. In other products the difference is greater: a bottle of 85 grams of soluble coffee costs USD 6.32 with 14% VAT, while in Ipiales it reaches USD 2.39. For Santiago Mosquera, a professor at the USFQ – Business School, The main reason for maintaining a high level of purchases in Ipiales is the exchange rate of the currency. “The Colombians have allowed their currency to depreciate against the dollar and this gives them greater competitiveness in the relationship Ecuador vs. Colombia”.

In addition to the exchange rate, wages are lower in Colombia, so it is cheaper to produce there, says Mosquera. The basic salary in the neighboring country is 689 454 pesos; If calculated at 3312 pesos for each dollar is equivalent to USD 208, while in Ecuador, the minimum wage is at USD 366. Another attraction that Ecuadorian entrepreneurs see in Colombia are the efforts they have made in the last five years to improve their Profile as recipients of foreign investment. The Colombian economy ranks 54th in the Doing Business 2015 ranking. This World Bank classification takes into account if the regulatory environment is more favorable for the creation and operation of a local company. Ecuador is on site 117 in this list. According to estimates made by Amador Anchundia, 67, there are toiletries and groceries that are almost 40% cheaper in Ipiales. But he believes that for Ecuadorians living near the border is more convenient because they can return the same day and do not incur additional hotel or gas costs. He lives in Manabí but his family is in Quito. Daniela Recalde and her husband are aware of the extra expenses so they prefer to go by bus and return the same day. They travel every four months, mainly, to buy toiletries, sweets , Coffee and sometimes clothes . They target between USD 100 and 150 for shopping and travel. Entrepreneur Harold Delgado , president of the Chamber of Commerce of Ipiales, points out that having a depreciation of the Colombian currency, production is less expensive and this makes the local industry grow and attract more and more Ecuadorians …

Muhammad Yunus: Empowering Women in Developing Countries

By Adrian Requena
Dear World

“Portrait of Muhammad Yunus”

In 2006, Muhammad Yunus was awarded the Nobel Peace Prize for innovating the credit market. He established the first microcredit institution, Grameen Bank, for the purpose of empowering the poor and giving them an opportunity to become independent entrepreneurs. Yunus had another equally as important goal when he envisioned the revolutionary microcredit service; gender equality.

At the HUB Chamber of Commerce in Santo Domingo, Dominican Republic, Yunus addressed multiple microcredit institution and delivered the conference “Eradicating world poverty, one loan at a time”. Here, he urged the present party to note and continue integrating his principles that make microcredit such a successful venture.

Yunus seems to have noticed that lending money to women is more beneficial to the household. He argues that women are more cautious and therefor spend differently than men. We will discuss this later on in this blog. First, it is crucial to understand the inequality women face in most, if not all, developing countries.


 The Reality of Women in Developing Countries


In Julie Shaffner’s “Development Economics: Theory, Empirical Research, and Policy Analysis”, she notes that the lives of women and girls in developing countries are much harder than that of men and boys. Within households, women and girls frequently consume less, work longer hours, and have generally fewer rights compared to men and boys. Shaffner continues to describe what it is like being a girl in South Asia and China, where they receive lower quality of food, are less likely to receive health care when they are sick, and have a higher mortality rate. Women work longer hours than men taking care of all the household chores and jobs needed to keep the family afloat.

This being said, they have more restrictions on their freedom and fewer rights to own property. In many developing areas women have little to no decision-making power when it comes to the finances of the household. Yunus recalls a conversation he had with a woman in India about to receive a loan. She told him, “I have not touched money in my life… how am I going to use this money if I do not know how to handle it?” There is clearly something wrong with this picture, good thing Yunus recognized the problem and decided to do something about it.

Yunus continues to address exactly what his approach towards gender equality was. Under normal circumstances, bank loans should aim at women participation levels of about 50%, likewise for men. Grameen Bank aimed at making 90% of the loans go to poor women. This goal and change of focus by a bank really made an impact and truly empowered women who previously did not have many opportunities. Looking at empirical data around the developing world, this makes a lot of sense. Women are more likely to be self-employed than men. Shaffner reports that in urban Vietnam, “more than 40% of men and more than 60% of women are self employed”. It wasn’t until later that empirical research began to show what the real outcomes of lending to women were.


Impact of Women Decision-Makers


Katherine Esty, Ph.D in social psychology and founder of Ibis Consulting Group, spoke with Yunus in 1994 and was enlightened by the notion that lending to women almost always leads to better spending in ways that help their families over time. Yunus told Esty that women are less likely to use the borrowed money to buy unnecessary goods and luxuries like men, instead, they do what is best for the family and spend money on food and health as well as goods like cows, chickens, or seeds that could be sold and profited off of in the future.

This hypothesis can also by backed up by evidence presented by Shaffner from empirical research in Brazil. Thomas (1990) found that non-labor income in the hands of women had a bigger positive impact on family health and child survival rate than said income in the hands of men. Shaffner continues to point out a study by Duflo (2003) in South Africa. They found that pension income in the hands of women had a positive impact on girls nourishment in the household, while the same could not be said for pension income in the hands of men.

Much like Yunus before, Shaffner comes to the conclusion that “channeling development program benefits to women rather than men can increase program impact on household nutrition and other investments in the human capital of children”.


Prior to Yunus’ Grameen Bank, the participation of women in financial decisions in the household were close to none, Esty points out that 98% of borrowers at commercial banks in Bangladesh were men. Apart from being unjust and wrong, this is extremely inefficient and unproductive. Looking at this from an economic stand point, having 50% of the population that work the hardest and know what is best for the household not able to access capital was completely inefficient.

In order to alleviate poverty in the developing world, Yunus realized, women must be given equal rights when it comes to borrowing and making the tough decisions in the household. Hopefully Yunus’ believes and standards remain at the core of all microcredit institutions around the world.




Pascual, Kelvin. “Yunus: prestarle a mujeres es más beneficioso para familias.” Hoy digital. N.p., 17 Mar. 2017. Web. <http://hoy.com.do/yunus-prestarle-a-mujeres-es-mas-beneficioso-para-familias/&gt;.

Esty, Katherine. “5 Reasons Why Muhammad Yunus Focuses on Lending to Women.” Web log post. Impatient Optimist . Bill & Melinda Gates Foundation, 10 Jan. 2014. Web. <http://www.impatientoptimists.org/Posts/2014/01/5-Reasons-Why-Muhammad-Yunus-Focuses-on-Lending-to-Women#.WPaLqGTyub8&gt;.

FDI and Financial Development: A New Answer to an Old Question

An analysis of new evidence suggesting a critical linkage between financial development and FDI and the need for strong financial institutions across the world.
Griffin Riddler

When discussing poverty and economic growth in developing countries, the topic of foreign direct investment (FDI) often comes up. Multiple empirical studies show that FDI helps to spur economic growth and reduce poverty by increasing opportunities for wage employment and improving technology and productivity, among other factors. In “The Effects of Financial Development on Foreign Direct Investment”, Rodolphe Desbordes and Shang-Jin Wei investigate how financial development in both source and destination countries impact different varieties of FDI.

Linking FDI to Development

One case study in Senegal found that even in what was considered “a worst-case scenario” with a single multinational enterprise (MNE) controlling the entire supply chain, FDI in the agro-industry had “robust, significant, and large positive effects on income and poverty reduction” (Maertens, Colen, & Swinnen, 2011). Researchers in Bolivia likewise determined that “FDI inflows enhance economic growth and reduce poverty” (Nunnenkamp, Schweickert, & Wiebelt, 2007). Deng Xiaoping famously opened China to FDI as part of his larger economic reforms, hoping to use foreign capital to kick the Chinese economy into high gear. Clearly, both economists and policy makers view FDI as another tool in the quest to boost growth and reduce poverty around the world.

A Literature Review of Financial Development and FDI

When studying FDI, researchers noticed something rather obvious: the level of FDI flows dropped worldwide in 2008 and 2009, the same time period as the global financial crisis. As FDI is reliant upon external financing from banks and other institutions, it made sense that financial development should affect FDI levels. However, until recently, studies into the effects of financial development, whether it be in source countries (SFD) or destination countries (DFD), on FDI have been stymied by shortcomings in the research design.

The authors of this working paper, Desbordes and Wei, identified three key problems with previous studies. First, by using balance of payments (BOP), other studies do not include external financing from within destination countries which prevents a proper comparison of DFD to SFD. This is compounded by a risk of bias due to imprecise estimates of control variables and country fixed effects. That, in turn, makes it very difficult to definitively show that financial development has long-run effects on FDI.

Finally, the studies that do attempt to limit omitted variable bias through the use of restricted data sets thereby limit the scope of their findings. The results: the vast majority of studies do not cover the total effects of SFD and DFD on FDI. These shortcomings drove Desbordes and Wei to construct a differences-in-differences model which utilized “variations in both country-specific financial development and sector-specific financial vulnerability” (Desbordes & Wei, 2017) to determine the impacts of both SFD and DFD.

Building a Model

After briefly postulating that SFD and DFD have net positive effects on FDI, whether a direct “external finance effect” or indirect effects on overall production, Desbordes and Wei established their definitions of the different types and margins of FDI that they measured. The different types roughly group into two categories, initial investment, represented by greenfield FDI and M&A FDI, and expansion FDI. For those unfamiliar with the first two terms, greenfield simply means establishing an entirely new foreign branch of the enterprise, while M&A is the acquisition of an extant firm in the destination country. As for the margins, the paper measures two kinds: the extensive margin, or the number of FDI projects in a given sector, and the intensive margin, or the average size of said projects.

The data used in “The Effects of Financial Development on Foreign Direct Investment” comes from two sources. Desbordes and Wei use the fDI Markets database complied by the Financial Times to measure greenfield and expansion FDI. The data does not distinguish between sources of external financing, making it superior to BOP measurements, and allows for the breakdown of FDI by sector. For M&A FDI flows, not included in the fDI Markets data, the authors use the Zephyr database, which includes comprehensive measurements of cross-border M&A deals by country and sector since 2003.

Desbordes and Wei, in an attempt to isolate the causal effects of SFD and DFD, created a model focusing on the interactions between SFD or DFD and a specific sector’s financial vulnerability (FV). In the first exponential regression, SFD and DFD were measured as the private credit to GDP ratio at time t-1, while country-pair and sector fixed effects were measured at time t, with FV (fraction of capital expenditures not financed by cash flows from operations) remaining a time-invariant measure. The coefficients of the interaction terms, β1 and β2, find the total effects of financial development on the different types of FDI.

FDIijst = exp(β1[ln(SFDit−1) · FVs] + β2[ln(DFDjt−1) · FVs] + αijt + αstijst

The next piece of the model expanded upon the first regression by controlling for the pre-sample size of the manufacturing sectors in both countries. This change meant that now the coefficients only captured the direct effects of SFD and DFD on FDI. (β1γ1) and (β2γ2) therefore represented the indirect effects on FDI, which the authors predicted to be positive. For both regressions, Desbordes and Wei restricted sample data to the period of 2003 to 2006 in order to avoid spillover effects from the financial crises that started in 2007.

FDIijst = exp(γ1[ln(SFDit−1) · FVs] + γ2[ln(DFDjt−1) · FVs] + γ3ln(Yis) + γ4ln(Yjs) + αijt + αstijst

Results and Conclusions


As shown by Table 1, the regressions run on the first model show that even with a variety of control variables, the results are unchanged: across all countries, DFD and SFD are found to have significant positive effects on FDI. These results show a conclusive link between financial development and bilateral FDI, but the first set of regressions only measures the total effects.


Table 2 shows the differences-in-differences approach the authors took to measure the indirect effects of financial development. In column (3), the differences shown at the bottom are those measurements: SFD and DFD appear to have both positive direct and indirect effects on FDI. Columns (5), (7), and (9) detail the effects of financial development on the extensive (5 & 7) and intensive (9) margins of FDI. Overall, SFD and DFD have net positive effects on greenfield FDI, with the primary driving mechanism being a strong effect on the average size of FDI projects.


Table 3, a series of regressions involving expansion FDI, tells a different story. While both SFD and DFD have significant positives effects on expansion FDI, where those effects occur differs for the different sources. The vast majority of SFD’s effects (~75%) translate into an increased presence of FDI (more projects), while DFD tends to lead to greater average size of said projects. In addition, the total effects of financial development on expansion FDI are only 66-75% the size of the effects on greenfield FDI.


The final form of FDI, M&A, is shown to be strongly and positively affected by SFD and DFD, at an even higher level than greenfield or expansion FDI. In summary, the results of all three models lead to the validation of the authors’ hypothesis that SFD and DFD have both direct and indirect impacts on all forms of FDI.


This paper makes one thing absolutely clear: countries wishing to attract FDI or spur an international expansion of their own MNEs must implement policies designed to secure the financial sector. The global financial crisis showed that, as FDI flows across the world plummeted due to instable credit markets. Developing countries in particular should include financial development in their growth strategies: by creating financial institutions with a strong foundation, they can attract more FDI to their nation and spur faster growth and reductions in poverty.


Desbordes, R., & Wei, S.-J. (2017). The Effects of Financial Development on Foreign Direct Investment. Cambridge: National Bureau of Economic Research.

Maertens, M., Colen, L., & Swinnen, J. F. (2011). Globalisation and poverty in Senegal: a worst case scenario? European Review of Agricultural Economics, 38(1), 31-54.

Nunnenkamp, P., Schweickert, R., & Wiebelt, M. (2007). Distributional Effects of FDI: How the Interaction of FDI and Economic Policy Affects Poor Households in Bolivia. Development Policy Review, 25(4), 429-450.

Cover image courtesy of: http://www.investopedia.com/video/play/foreign-direct-investment/