Week of February 21, 2021
Editor's Note: TL;DR: The faiV has been missing because of a combination of launching a big new research project and some changes that we'll be making based on feedback from readers, but I'm back now.
Also, register here for the next faiVLive, "Accounting for the Gender Profit Gap" with Nava Ashraf, Morgan Hardy and others on March 2nd.
–Tim Ogden
1. The faiV: This is the first faiV since the Fall, and there are a number or reasons for that. In its first generation, the faiV was written by Alicia Brindisi, and I lightly edited it. That's back in the days when there were mostly just 5 links each week. When Alicia left FAI, I took over writing the faiV each week and it quickly evolved into the second generation--with 5 "items" but lots of links in each item, with a generous helping of commentary. After 3+ years of writing the faiV 45+ times a year, I needed a break. That coincided with some additions to the FAI staff that also allowed us to take a step back and think about what the future of the faiV should be, with a lot of input from regular faiV readers. This week, then marks the beginning of the 3rd generation of the faiV. You'll notice a few changes right away--like the new logo--and few others. Over time there will be a few more changes, including a likely move to Substack so I can be like all the cool kids. But most of that doesn't really matter.
What does matter to you as a reader is that the faiV will be mostly every other week rather than every week, with allowances for special circumstances to be more or less frequent. I'll also be a bit more focused, or at least have less anxiety about being comprehensive. Finally, we're also going to continue investing in the webinar/podcast version of the faiV, faiVLive. Our next faiVLive will me on March 2nd at 9am, with a focus on gender differences in small firms (more on that below), so go ahead and register here.
The other big reason for the absence of the faiV for the last few months is I've been very consumed with the launch of the next big research project at FAI, the Small Firm Diaries.
2. Small Firms: The Small Firm Diaries is an attempt to better understand what is happening with the small firms that make up the majority of employment in most developing countries. We're deliberately avoiding the terms SME and MSME for clarity since definitions of those terms varies across time and context. Small firms, in our definition, are firms with 2-20 non-family employees. The theory behind those boundaries are these are firms that have the capital, human and financial, to have employees, but are not so large that they have professional management. With initial support from the Mastercard Impact Fund/Center for Inclusive Growth, and joined by the Gates Foundation, Argidius Foundation, FSD-Kenya, ANU, UNESCAP, and ANDE we're going to be following roughly 100 firms for a year in seven countries: Colombia, Nigeria, Kenya, Uganda, Ethiopia, Indonesia and Fiji. We'll have a lot more to say in the coming weeks at the Small Firm Diaries site about the details and why we are so interested in better understanding those firms. So subscribe for updates on the Small Firm Diaries by scrolling to the bottom of the page (yes, I realize writing this out that I need to have a direct link to subscribe, but details like that are what keep me from getting the faiV out, so we'll deal with that later.)
But one of the key things we'll be studying is the differences between male and female-led small firms. Reviewing what we know about gender differences in small firm size, revenues, employment, growth and profits is the focus on the upcoming faiVLive, "Accounting for the Gender Profit Gap". I'll be discussing the issues with Nava Ashraf (check out her cool paper about how rule-of-law affects the choices and investments of women business owners); Morgan Hardy who has done a lot of work on the gender profit gap in Ghana and Ethiopia (also check out the under construction Gender Profit Gap site Morgan and Gisella Kagy have set up; and with practitioners from India and Latin America who focus on serving women-led firms. So register here to join us on March 2nd at 9am EST/2pm GMT/5:30pm IST.
In addition to the Small Firm Diaries, there is another big new diaries research project focused on small firms. While the Small Firm Diaries is explicitly looking at non-retail firms, the new Corner Shop Diaries project led by MSC and L-IFT is focusing on the shops that are central to the daily lives of so much of the world's population (Full Disclosure: L-IFT has sponsored the faiV in the past and is a partner in the Small Firm Diaries). They'll be studying shops in 8 countries in Asia and SSA. Here's a video describing their approach, and here's one of the first stories out of the project. Definitely something to keep tabs on.
As you know, I'm very interested in small firms in excluded communities in the United States as well. Here's something I wrote with Joyce Klein of Aspen recently about a project to increase capital flow to the lenders who serve entrepreneurs of color in low-income neighborhoods in the US--the basic idea is to start to recreate some of the capital structure that allowed the massive expansion of microfinance globally. And here's a new paper looking at the prospects of a "time bomb" for SMEs in developed countries that have survived the pandemic but may then be faced with increased debt burdens while credit contracts and be forced into insolvency as a result. It's one of my main concerns about the approach to small business support in the US mainly being through additional (albeit forgivable) debt. But that is also an issue for the lenders who have cash flow and liquidity challenges of their own to deal with, especially if there is little appetite or space for borrowing at closer to market rates during the recovery.
3. Microfinance: I'm not sure if I should be apologizing or reassuring that I'm still going to be paying a lot of attention to household finance, microfinance, digital finance and general topics of financial inclusion, development and social investing. And there are of course interesting developments and research in each of those domains.
On the microfinance front there remain a lot of questions about what comes next. Here is Beth Rhyne reviewing lessons from microfinance moratoria in India, Peru and Uganda. There certainly hasn't been the carnage that I thought was very likely last spring, but it's decidedly unclear whether like the SMEs in the paper mentioned above, the global microfinance industry is still facing a ticking time bomb. There are certainly some reports like this from India that suggest a very volatile situation with potential for lots and lots of defaults and write-offs. To keep up with those developments, I'm pleased to say that a group of researchers are working on tracking the evolution of the industry in a variety of countries while the recovery is happening--what we're calling the Sentinel Project. The project is centered around on-going interviews with leaders of MFIs. Stay tuned for more on that front in the coming weeks/months.
I also want to mention two new papers from Roy Mersland and friends on important operational questions in microfinance that have been understudied. First, here's "Excessive Focus on Risk?" which looks at whether the industry has put too much emphasis on minimizing default rates, to the point where it is driving up costs beyond the gains. They find that there is in fact a U-Shape to the curve and overall performance could be improved by cutting costs on underwriting and collection and accepting slightly higher default rates. Second, here's a paper on optimal employee selection for MFIs. There are good arguments to made for hiring people most like borrowers, and for hiring people with higher initial human capital endowments (as proxied for by socioeconomic status). Naome Otti, Kjetil Andersson and Mersland find that there is a measurable productivity gain from hiring above the bottom of the pyramid (a result that echoes the apparent behavior of small firms in Bangladesh, and one of the questions we're going to be paying a lot of attention to in the Small Firm Diaries).
Finally, here's a new paper from Faisal Bari, Kashif Malik, Muhammad Meki and Simon Quinn on an asset-based financing experiment in Pakistan that provided significantly larger (4x) loans than normal microfinance to some firms in Pakistan. The loans are conditioned around an investment in a fixed asset, and firms that do borrow have larger businesses and higher profits. There's a lot going on in the treatment, including some flexibility in repayment amount and timeline, and a way of looking at the loans as partially an equity investment given interest-charging limitations in Pakistan. That's interesting because equity for micro/small firms has been something of a holy grail in this space, but frequently is a poisoned chalice.
4. Digital Finance: Sticking to some interesting new research, here's a paper from Burlando, Kuhn and Silvia Prina on digital credit in Mexico--specifically, the effect of how quickly a loan is funded. One of the widely touted benefits of digital credit and widely critiqued potential harms of digital credit is how fast it is relative to traditional microlending. On the benefit side, poor people face lots of liquidity challenges and the notoriously rigid (see Mersland paper above) microfinance process makes microcredit a poor option for responding to shocks. On the harm side, well there's all that data about spikes in digital credit on Friday nights, which presumably is not a time likely to have lots of time-limited opportunities for productive investment. In this case, because of a quirk of the internal process at a Mexican lender, some borrowers face an arbitrary delay in getting a loan funded from 10 to 20 hours. It doesn't seem like a lot, but the delay has a material effect--it reduces default by 20%. So what's going on? That's a good question and the data Alfredo, Mike and Silvia have don't really allow answering it, but I know they would be very interested in your hypotheses.
The big takeaway is that this is an area that deserves a lot more study. And soon.
Of course, the potential benefits of digital finance go well beyond just speed. Here's a new paper studying the growth of fintech in China, and finding it helps "households move toward optimal risk-taking," especially more risk-tolerant households. Yes, that is a frame that causes my eyebrows to climb well up toward my hairline--I still have a lot of unpacking to do there. But you can't believe in the value of financial inclusion without believing that households need tools to enable investment and that investment necessarily involves some risk-taking. What optimal risk-taking exactly is often is in the eye of the beholder, to whit, here's a story about booming fintech driven personal lending in the United States. I think this is way too breathless, but it is a concern.
The paper uses data from China, specifically from Ant Financial, which is a fascinating case. While I was gone, a lot was happening with Ant Financial. It was supposed to have the world's biggest IPO. That was suddenly canceled when founder Jack Ma objected to the Chinese government's stepping up regulation and enforcement of consumer finance companies in China. And for a while there were even questions about whether Ma had been disappeared by the government. While Ma has subsequently appeared in public, there remain questions about the future of Ant, and by extension the future of Chinese fintechs.
That's more important from a global perspective than you might realize. I'm now continually hearing stories about a flood of white-labeled predatory Chinese fintech apps popping up in India, Indonesia, Mexico and elsewhere. It seems likely that this is a spillover effect of tighter controls on the Chinese domestic market. If you see stories or research about this, please do pass them on.
5. Development Research: To close out, here are two new papers that make me hopeful about the future of development research. First, here's Buera, Kaboski and Townsend on progress in unifying macroeconomic thinking on development with micro-experimental research. The two definitely need each other and despite all the rhetoric progress is being made.
Second here's a new paper from Blattman, Gustavo Duncan, Benjamin Lessing and Santiago Tobon on criminal governance in Medellin, Colombia. It's interesting even if you don't care about criminal governance or Colombia, because they blend interviews with gang members, a large household survey, a small-scale experiment and a policy change to really provide insight on some really hard to answer questions about state capacity and the process of development. If you want the quick highlights here's a Lyman Stone Twitter thread. In it's own way, it's a quite different example of macro-micro synthesis.
Non-Graphic of the Week
Here's a post on the limits of data visualization through the lens of the NYTimes graphic on 500,000 American COVID deaths.
