The Anxious Edition
Editor's Note:
The only two predictions I feel I confident in making right now are that a) we will find some new phrase for opening a conversation other than "How are you?" or at least some new way to answer the question, and b) that the trend of putting webcams on the bottom of a laptop screen is over.
Thanks to all of you who reached out in reaction to the abbreviated version of the faiV last week focused on my concerns about the future of microfinance in the US and globally. Please keep sending information and thoughts my way.
Our next faiVLive is going to be next Friday to discuss how we should be thinking about the impact of COVID-19 on poor households in developing countries, what policy interventions are plausible and possible, what role microfinance has to play, what needs to happen to enable the global microfinance industry to be useful now and in the mid-term, etc. Stay tuned for details.
—Tim Ogden
1. Existential Crisis Updates, US
Here's more on the situation in the US, in a piece I co-authored with Bill Bynum of Hope Credit Union and Joyce Klein of the Aspen Institute's Business Ownership Initiative. There wasn't any specific direction of funds in the CARES Act for CDFIs, but there is room in the discretionary authority of the Treasury and the Fed to direct funds to micro- and small business lending by CDFIs.
Based on the conversations I'm having, a few things have become clear to me. First, small and micro-lending CDFIs are the only institutions capable of getting funds quickly to the most vulnerable communities and neighborhoods in the US. Second, without injections of liquidity and equity, those institutions are like front-line healthcare workers without PPE. They will be able to help a lot of people in the short-term but not over the long-term because they will "catch the infection" too. Third, there is a collective action problem as lots of public and private actors capable of providing the liquidity and equity seem to be taking a "wait and see" approach to gauge the response from others. Which means there is a huge opportunity for leadership and leverage/crowding-in for anyone willing to take the first steps. Fourth, now is the time to lean in on advocacy at all levels to make sure that the communities and neighborhoods that got left behind after the Great Recession don't get left behind again.
2. Existential Crisis Updates, Global
On the global front, here's a piece I co-authored with Greta Bull of CGAP, on the potential for massive disruption of the microfinance industry. I have heard from a few people that they think I'm doing the sector a disservice by encouraging panic where none is warranted. They note that microfinance has survived many crises in the past and in fact came through 2008 with flying colors. But most of what I've heard in the past week confirms my worries. Let me lay out why I'm so worried, and why I think taking comfort from microfinance's performance in past crises is wrong.
The current situation is unprecedented for the microfinance industry because it combines 1) A global macroeconomic shock with capital "flight to quality" (like 2008) with foreign exchange imbalances important in some cases, 2) Little fiscal space for many (most?) developing countries to react and support the overall economy, much less the microfinance sector, because of significant official borrowing since 2008, 3) A global health crisis that is going to command the attention and dollars of many donors, 4) An actual or potential repayment shock (like Andhra Pradesh, or "No Pago" movements) where there is sudden and massive reduction of payments on existing loans, and 5) For deposit taking institutions, a drawdown of savings as customers try to cope with the local economy shock. That means that capital flowing into microfinance is likely to drop at the same time that funds from repayments dry up, and the rescue committees are going to be occupied with propping up health systems and overall fiscal stability. And that is a recipe for existential crisis, particularly if there is delayed action.
If you doubt the potential for repayment crises, consider that in some countries the government-ordered shutdowns allow banks to remain open but not MFIs. Consider that many governments in developing countries have responded to economic shocks in the past by unilaterally issuing moratoriums on loan repayments, as India has already done. Consider the very large numbers of people leaving urban centers in India and Bangladesh because of shutdowns. Consider governments closing down street vendors who have few options for earning income to service their loans. The Soul of Finance blog reports that half of respondents to their survey in the past week have had their operations shut down.
What's next? My sense is that the most important short-term action is a set of principles for preventing liquidity from flowing out of MFIs immediately. This means that investors of all stripes agree to defer any payments on debt, and relax covenants related to capital adequacy ratios, repayment rates, etc. I hear that many investors are proactively doing this, but I don't think the sector is best served by piecemeal actions one investor and one MFI at a time.
In that vein, here's a quick piece we put together this week based on papers of Deb Burand; she played a key role in negotiating and implementing principles for investors in MFIs that helped the sector weather the Financial Crisis. These principles from CGD on debt relief for countries has a lot of application for debt relief of MFIs. In other helpful resources, here are some thoughts from FSDUganda. Here's a guide to business continuity for MFIs from ADA Microfinance.
3. The Great Divergence
For about 18 months now I've been exerting a lot of energy trying to convince people that the challenges of middle-income countries and the bottom half of the income-distribution in wealthy countries are shared, especially when it comes to financial inclusion. You could still make that argument--and in some ways I am as I write about the shared threat to microfinance in the US and globally.
But events now force me to think about the remaining divergence, which looms much larger than it did a few weeks ago. What may happen in developing countries as COVID-19 spreads is deeply frightening, while still uncertain. There are real questions coming to the fore about the value of lockdowns and social distancing in countries where flattening the curve isn't going to make much difference to the already overwhelmed health systems. Here are some thoughts from Martin Ravallion on the virus, poor people and policy.
There are a lot of potential channels for impact. The one I spend the most time thinking about is the effect on household consumption from massive numbers of rural-to-urban migrants losing paid work, not being able to remit to their families and potentially returning to their villages. There are obviously a lot of concerns there from food security to rapidly spreading the virus to rural areas that may otherwise have been somewhat protected. That may also make them harder for relief programs to reach and will certainly impair our ability to see what the impact is, but there are hints. Stuart Rutherford's Hrishipara Diaries are an invaluable tool. Bankable Frontier Associates has a quick response survey covering 7 countries, 2 wealthy and 5 developing. At this stage it looks more like an argument for the Great Convergence than Divergence but stay tuned.
Of course, everyone's income is disrupted and whether they qualified as poor before the crisis, on in income basis practically everyone is poor in many countries now. Here's a question from David McKenzie about the possible policy responses in low-income countries in relation to firms, and lots of useful replies.
But of course, the real question is what impact does this have on people, especially the poor, and are there ways to mitigate that impact? Another channel that I'm thinking about is what is the mid-term effect on morbidity and mortality from other diseases (pneumonia, diarrhea, TB) in developing countries that lose a large percentage of their health care workers? If you know of people working in that domain, please let me know.
Our next faiVLive is going to be next Friday to discuss these issues--how should we be thinking about the impact on poor households in developing countries, what policy interventions are plausible and possible, what role does microfinance have to play, what needs to happen to enable the global microfinance industry to be useful now and in the mid-term, etc. Stay tuned for details. The exact timing will depend on lining up our final list of speakers.
4. Digital Finance
Oh so many things to think about. What does the pandemic mean for digital finance? I speculated about this a bit last week: "I would guess we'll see an incredible amount of consolidation in digital finance, and we may just finally see the push to get past the cash in/cash out model of mobile money." Others are thinking along the same lines. Here's a piece from NextBillion on whether the pandemic will push Africa's mobile money systems to the "next level." Here's a different review of what is happening in various countries to encourage mobile money adoption. Here's the Better than Cash Alliance's take. Lots of folks are pointing to the experience in Sierra Leone during Ebola as offering useful lessons.
I, of course, have questions. It's not clear to me that the positive nudge to mobile money systems is bigger than the negative nudges. For instance, how do people adopt mobile money if they cannot work with agents to sign up and learn how to use the systems? I'm hearing lots of stories about mobile money agents being forced to close by overzealous local actors even when they are specifically excluded by shutdown orders. Even when mobile money agents are operating, we need to be cognizant of the fact that they may be the superspreaders of the developing world. And if speculation about "dosage" of viral infection being important to mortality is true, mobile money agents could have higher mortality rates. The agents themselves may start discriminating in who they serve.
For digital finance to play a positive role, a lot more people have to sign up--and those people are going to be the least comfortable with the technology, and therefore the most prone to making mistakes and vulnerable to fraud. How will those customers be protected? Will the injection of a large number of inexperienced users make the systems more vulnerable to systemic fraud and bring systems down?
We also should be worried about who remains left behind in such a transition. There is no chance for the kind of outreach programs necessary to reach the excluded: the rural, the illiterate and innumerate, the poorest of the poor who do not have access to the technology. That's a problem still in the United States, and it will remain a big problem in many developing countries.
What about the rest of the digital finance ecosystem? I suspect that most digital-only lenders are going to fail and fail soon. I simply don't see any borrowers prioritizing making payments on their digital credit, and I especially don't see governments or others being willing to "rescue" digital lenders that are often not local. Will the failure of the digital lenders (if it happens) cause a ripple effect that hampers other parts of the system or changes how people view digital finance systems? How might that change people's willingness to adopt and use mobile money and mobile wallets?
The bottom line for me is that I see a lot more questions than answers and a lot more possibilities for a negative impact on digital finance than I see being reflected in what I'm reading. If you have thoughts on any of this--especially if you're seeing things happening on the ground--I would love to hear from you.
5. Research and Evidence-Based Policy
Obviously it's lower on the list, but I do also think about the effect of the pandemic on research, and on researchers. To a first approximation, the applied development economics field is essentially dead for a couple of years. Any project that is in the field right now is now no longer measuring what it thought it was measuring, if it can continue at all. There's 12 to 18 months of papers in the pipeline, but there are going to real questions about the external validity and applicability of those papers in a post-COVID world. No new fieldwork is going to start for some indeterminate amount of time (and ethical reviews are likely to be all over the place). The long-term impact on the careers of young development economists (and those in training) is going to be massive. On a positive note, Karen Grepin pointed out to me in a conversation that the long-term impact on researchers in developing countries is likely to be positive--developed world researchers are going to have to rely on in-country partners far more than ever before and presumably for a long time to come as international travel is likely to be impeded for a very long time.
Understandably I'm seeing a lot of people attempting to pivot their existing fieldwork to ask questions about the impact of COVID via phone surveys. Here are David McKenzie and Berk Ozler with thoughts on what to do about an ongoing field research project. Here's a webinar from Tavneet Suri on transitioning to phone surveys. Justin Sandefur put a call on Twitter to find out who is doing what in this area and there A LOT of responses but I suspect cover just a very small percentage of what is actually happening in the field. The impulse to pivot or start new work to measure impact is understandable but I worry that what we are going to see is a lot of not great surveys telling us that things are bad. I'm not sure what the policy-relevance of that data is going to be. The important questions start with: what is a plausible and possible policy response, and what information is needed to inform that response? Obviously preventing people from starving is important but I'm not sure how many surveys we need to know that.
As always, if you have thoughts on any of this, please do share them as well.
Graphic of the Week
The Viral Perspective, from XKCD
